[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.103-8]
[Page 361-379]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1--INCOME TAXES--Table of Contents
Sec. 1.103-8 Interest on bonds to finance certain exempt facilities.
(a) In general--(1) General rule. (i) Under section 103(b)(4),
interest paid on an issue of obligations issued by a State or local
governmental unit (as defined in Sec. 1.103-1) is not includable in
gross income if substantially all of the proceeds of such issue is to be
used to provide one or more of the exempt facilities listed in
subparagraphs (A) through (J) of section 103(b)(4) and in this section.
However, interest on an obligation of such issue is includable in gross
income if the obligation is held by a substantial user or a related
person (as described in section 103(b)(13) and Sec. 1.103-11). If
substantially all of the proceeds of a bond issue is to be used to
provide such exempt facilities, the debt obligations are treated as
obligations described in section 103(a)(1) and Sec. 1.103-1 even though
such obligations are industrial development bonds as defined in section
103(b)(2) and Sec. 1.103-7. 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. For purposes of this
``substantially all'' test, two rules apply. First, proceeds are reduced
by amounts properly allocable on a pro rata basis between providing the
exempt facility and other uses of the proceeds. Second, amounts used to
provide an exempt facility include amounts paid or incurred which are
chargeable to the facility's capital account or would be so chargeable
either with a proper election by a taxpayer (for example, under section
266) or but for a proper election by a taxpayer to deduct such amounts.
In the event the amount payable with respect to an issue during each
annual period over its term is less than the amount of interest accruing
thereon in such period, e.g., in the case of an issue sold by the issuer
for less than its face amount, see paragraph (a)(6) of this section to
determine the amount of proceeds of the issue.
(ii) The provisions of subdivision (i) of this subparagraph shall
also apply to an issue of obligations substantially all of the proceeds
of which is to be used to provide exempt facilities described in this
section and for either or both of the following purposes: (a) To acquire
or develop land as the site for an industrial park described in section
103(b)(5) and Sec. 1.103-9, (b) to provide facilities to be used by an
exempt person.
(iii) Section 103(b)(4) only becomes applicable where the bond issue
meets both the trade or business and the security interest tests so that
obligations are industrial development bonds within the meaning of
section 103(b)(2). For rules as to exempt facilities including property
functionally related and subordinate to such facilities, see
subparagraph (3) of this paragraph. For rules with respect to the
ultimate use of proceeds of obligations, see subparagraph (4) of this
paragraph. For rules which limit the application of the provisions of
this section see subparagraph (5) of this paragraph. For the
interrelationship of the rules provided in this section and the
exemption for certain small issues provided in section 103(b)(6), see
Sec. 1.103-10.
(2) Public use requirement. To qualify under section 103(b)(4) and
this section as an exempt facility, a facility must serve or be
available on a regular basis for general public use, or be a part of a
facility so used, as contrasted with
[[Page 362]]
similar types of facilities which are constructed for the exclusive use
of a limited number of nonexempt persons in their trades or businesses.
For example, a private dock or wharf owned by or leased to, and serving
only a single manufacturing plant would not qualify as a facility for
general public use, but a hangar or repair facility at a municipal
airport, or a dock or a wharf, would qualify even if it is owned by, or
leased or permanently assigned to, a nonexempt person provided that such
nonexempt person directly serves the general public, such as a common
passenger carrier or freight carrier. Similarly, an airport owned or
operated by a nonexempt person for general public use is a facility for
public use, as is a dock or wharf which is a part of a public port.
However, a landing strip which, by reason of a formal or informal
agreement or by reason of geographic location, will not be available for
general public use does not satisfy the public use requirement. Sewage
or solid waste disposal facilities and air or water pollution control
facilities, described in sections 103(b)(4) (E) and (F) and paragraphs
(f) and (g) of this section, will be treated in all events as serving a
general public use although they may be part of a nonpublic facility
such as a manufacturing facility used in the trade or business of a
nonexempt user.
(3) Functionally related and subordinate. An exempt facility
includes any land, building, or other property functionally related and
subordinate to such facility. Property is not functionally related and
subordinate to a facility if it is not of a character and size
commensurate with the character and size of such facility. Since
substantially all of the proceeds of a bond issue must be used for the
exempt facility (or for any combination of exempt facilities, industrial
parks, and facilities to be used by exempt persons), including property
functionally related and subordinate thereto, an insubstantial amount of
the proceeds of a bond issue may be used for facilities which are
neither exempt facilities (or a combination of exempt facilities,
industrial parks and facilities to be used by exempt persons) nor
functionally related and subordinate to exempt facilities. Thus, for
example, where substantially all of the proceeds of an urban
redevelopment bond issue are to be used by a State urban redevelopment
agency for residential real property for family units within the meaning
of section 103(b)(4)(A) and paragraph (b) of this section, an
insubstantial amount may be used for an industrial or commercial project
or for any other purpose that is not functionally related and
subordinate to the residential real property for family units.
(4) Ultimate use of proceeds. The question whether substantially all
of the proceeds of an issue of obligations are to be used to provide one
or more of the exempt facilities listed in subparagraphs (A) through (J)
of section 103(b)(4) and in this section is to be resolved by reference
to the ultimate use of such proceeds. For example, such proceeds will be
treated as used to provide residential rental property whether the State
or local governmental unit (i) constructs such property and leases or
sells it to any person who is not an exempt person for use in such
person's trade or business of leasing such property; (ii) lends the
proceeds to any such person for such purpose; or (iii) lends the
proceeds to banks or other financial institutions in order to increase
the supply of funds for mortgage lending under conditions requiring such
banks or other financial institutions to use such proceeds only for
further lending for residential rental property.
(5) Limitation. (i) A facility qualifies under this section only to
the extent that there is a valid reimbursement allocation under
Sec. 1.150-2 with respect to expenditures that are incurred before the
issue date of the bonds to provide the facility and that are to be paid
with the proceeds of the issue. In addition, if the original use of the
facility begins before the issue date of the bonds, the facility does
not qualify under this section if any person that was a substantial user
of the facility at any time during the 5-year period before the issue
date or any related person to that user receives (directly or
indirectly) 5 percent or more of the proceeds of the issue for the
user's interest in the facility and is a substantial user of the
facility at any time
[[Page 363]]
during the 5-year period after the issue date, unless--
(A) An official intent for the facility is adopted under Sec. 1.150-
2 within 60 days after the date on which acquisition, construction, or
reconstruction of that facility commenced; and
(B) For an acquisition, no person that is a substantial user or
related person after the acquisition date was also a substantial user
more than 60 days before the date on which the official intent was
adopted.
(ii) A facility, the original use of which commences (or the
acquisition of which occurs) on or after the issue date of bonds to
provide that facility, qualifies under this section only to the extent
that an official intent for the facility is adopted under Sec. 1.150-2
by the issuer of the bonds within 60 days after the commencement of the
construction, reconstruction, or acquisition of that facility. Temporary
construction or other financing of a facility prior to the issuance of
the bonds to provide that facility will not cause that facility to be
one that does not qualify under this paragraph (a)(5)(ii).
(iii) For purposes of paragraph (a)(5)(i) of this section,
substantial user has the meaning used in section 147(a)(1), related
person has the meaning used in section 144(a)(3), and a user that is a
governmental unit within the meaning of Sec. 1.103-1 is disregarded.
(iv) Except to the extent provided in Secs. 1.142-4(d), 1.148-
11A(i), and 1.150-2(j), this paragraph (a)(5) applies to bonds issued
after June 30, 1993, and sold before July 8, 1997. See Sec. 1.142-4(d)
for rules relating to bonds sold on or after July 8, 1997.
(6) Deep discount obligations. (i) Except as otherwise provided in
paragraph (a)(7) of this section, the proceeds of any issue of
obligations sold by the issuer after June 4, 1982, shall include any
imputed proceeds of the issue. The imputed proceeds of an issue equal
the sum of the amounts of imputed proceeds for each annual period
(hereinafter, bond year) over the term of the issue.
(ii) The amount of imputed proceeds for a bond year equals--
(a) The sum of the amounts of interest that will accrue with respect
to each obligation that is part of the issue in such year, reduced (but
not below zero) by
(b) The sum of the amounts of principal and interest that become
payable with respect to the issue in that bond year.
(iii) Interest will be deemed to accrue with respect to an
obligation on an amount that, as of the commencement of that year, is
equal to the sum of--
(a) The purchase price (as defined in Sec. 1.103-13(d)(2)) allocable
to the obligation and
(b) The aggregate of the amounts of interest accruing in each prior
bond year with respect to the obligation, reduced by all amounts that
became payable with respect to the obligation in prior bond years. Any
amount that becomes payable during the 30 day period following any bond
year will be deemed to have become payable in such bond year. Thus, to
the extent interest on an obligation accruing during a bond year does
not become payable within 30 days from the end of such year, it is
treated as reinvested under the same terms as the obligation. For
purposes of this subparagraph (6), the rate at which such interest
accrues is equal to the yield of the obligation. Yield is computed in
the same manner as set forth in Sec. 1.103-13(c)(1)(ii) for computing
yield on governmental obligations (assuming annual compounding of
interest). Such computations shall be made without regard to optional
call dates.
(7) Deep discount obligations; special rules. (i) There are no
imputed proceeds with respect to an obligation if--
(a) The obligation does not have a stated interest rate
(determinable at the date of issue) that increases over the term of the
obligation, and
(b) The purchase price of the obligation is at least 95 percent of
its face amount.
At the option of the issuer, any obligation described in the preceding
sentence may be disregarded in computing the imputed proceeds of the
issue. Payments with respect to such obligations are also disregarded in
determining the amount payable with respect to the issue in that bond
year. If each obligation which is part of an issue is described in this
subdivision (i), there are no imputed proceeds with respect to the
issue.
[[Page 364]]
(ii) If the actual rate at which interest is to accrue over the term
of an obligation is indeterminable at the date of issue then, in
computing the yield of the obligation for purposes of this paragraph,
such rate shall be determined as if the conditions as of the date of
issue will not change over the term of the obligation. Thus, for
example, if interest on an obligation is to be paid semiannually at a
rate equal to 80 percent of the yield on six month Treasury bills at the
most recent public sale immediately prior to the corresponding interest
payment date and the yield on six month Treasury bills sold immediately
preceding the issue date is 10 percent, then the six month Treasury bill
rate is deemed to be a constant 10 percent for purposes of determining
the amount of imputed proceeds of the issue. Therefore, all interest
payments on the obligation would be deemed to be made at a rate of 8
percent.
(8) Examples. The principles of this paragraph may be illustrated by
the following examples:
Example (1). State A issues its bonds and plans to use substantially
all of the proceeds from such bond issue to purchase land and build a
facility which will be used for one of the purposes described in section
103(b)(4) and this section. The arrangement provides that (1) A will
issue bonds with a face amount of $21 million and with all accrued
interest payable annually, the proceeds of which (after deducting bond
election costs, costs of publishing notices, attorneys' fees, printing
costs, trustees' fees for fiscal agents, and similar expenses) will be
$20 million; (2) $18 million of the proceeds of the bond issue will be
used to purchase land and to construct such facility; (3) $2 million of
the proceeds will be used for an unrelated facility which will be used
by X, a nonexempt person, in a separate trade or business and for a
purpose not described in section 103(b) (4) or (5); (4) X will rent both
facilities for 20 years at an annual rental equal to the amount
necessary to amortize the principal and pay the interest annually on the
outstanding bonds; and (5) such payments by X and the facilities will be
the security for the bonds. On these facts, substantially all of the
proceeds will be used in connection with an exempt facility described in
section 103(b)(4) and this section. Accordingly, section 103(b)(1) does
not apply to the bonds unless such bonds are thereafter held by a person
who is a substantial user of the facilities or a related person within
the meaning of section 103(b)(13) and Sec. 1.103-11.
Example (2). On July 1, 1982, State B sells an issue of its
obligations to an underwriter in anticipation of a public offering. The
initial offering price is $18,627,639.69 of which $17,000,000 is to be
used to construct a pollution control facility described in section
103(b)(4)(F). X Corporation, a nonexempt person, is to use the facility
and, in exchange, is obligated to pay an amount equal to the face amount
of the issue when it becomes due. The obligations are issued on August
1, 1982. The face amount of the issue is $30,000,000. The issue is a
term issue with all obligations maturing on August 1, 1987. The issue
bears no stated rate of interest; there are no interest coupons on the
obligations. The bonds are industrial development bonds with a yield
(based upon annual compounding) of ten percent. Based on these facts,
the amount of imputed proceeds with respect to the issue is determined
as follows:
----------------------------------------------------------------------------------------------------------------
Purchase price
plus Imputed
Date accumulated Interest proceeds
interest
----------------------------------------------------------------------------------------------------------------
Aug. 1, 1983................................................... $18,627,639.69 $1,862,763.97 $1,862,763.97
Aug. 1, 1984................................................... 20,490,403.68 2,049,040.37 2,049,040.37
Aug. 1, 1985................................................... 22,539,444.03 2,253,944.40 2,253,944.40
Aug. 1, 1986................................................... 24,793,388.43 2,479,338.84 2,479,338.84
Aug. 1, 1987................................................... 27,272,727.27 2,727,272.73 0
------------------------------------------------
Total imputed proceeds....................................... ............... .............. 8,645,087.58
----------------------------------------------------------------------------------------------------------------
Therefore, proceeds of the issue equal $27,272,727.27 less issuance
costs. Substantially all of the bond proceeds are not used to provide an
exempt facility, and section 103(b)(1) applies to the issue.
Example (3). The facts are the same as example (2) except that the
issue has a face amount and purchase price of $18,500,000. The issue
also provides for one payment in addition to the redemption payment, in
the amount of $10,267,668 payable on or after August 1, 1986, one year
before maturity. Section 103(b)(1) applies to the issue.
Example (4). On July 1, 1982, City E sells an issue of industrial
development bonds to provide for a convention facility, as described in
section 103(b)(4)(C). Assume that the bonds are issued on that date as
well. The issue has
[[Page 365]]
a face amount of $15,240,000 and a purchase price of $11,929,382.53. The
estimated cost of the facility is $11,000,000. The bonds are ``zero
coupon'' bonds, i.e., there are no interest coupons. Each series is
initially offered for less than 95 percent of its face amount. The issue
matures serially over a five year period, with each series being
allocated a part of the purchase price of the issue. The following chart
indicates the purchase price and yield for each series and debt service
for the issue:
[[Page 366]]
[Amount allocable to each series]
--------------------------------------------------------------------------------------------------------------------------------------------------------
1984 series 1985 series 1986 series 1987 series Interest
Date 1983 series at 8.5 at 8.75 at 9.25 at 9.75 accruing on Amount due Imputed
at 8 percent percent percent percent percent issue* proceeds
--------------------------------------------------------------------------------------------------------------------------------------------------------
July 1, 1983................................ 2,939,814.82 2,697,020.54 2,468,629.60 2,228.732.51 1,595,185.06 ............ ............ 0
235,185.18 229,246.75 216,005.09 206,157.76 155,530.54 1,042,125.32 3,175,000 ........
July 1, 1984................................ ............ 2,926,267.29 2,684,634.69 2,434,890.27 1,750,715.60 ............ ............ 0
............ 248,732.71 234,905.54 225,227.35 170,694.77 879,560.37 3,175,000 ........
July 1, 1985................................ ............ ............ 2,919,540.23 2,660,117.62 1,921,410.37 ............ ............ 0
............ ............ 255,459.77 246,060.88 187,337.51 688,858.16 3,175,000 ........
July 1, 1986................................ ............ ............ ............ 2,906,178.50 2,108,747.88 ............ ............ 0
............ ............ ............ 268,821.50 205,602.92 474,424.42 3,175,000 ........
July 1, 1987................................ ............ ............ ............ ............ 2,314,350.80 ............ ............ 0
............ ............ ............ ............ 225,649.20 225,649.20 2,540,000 ........
-----------------------------------------------------------------------------------------------------------
Total..................................... ............ ............ ............ ............ ............ ............ 15,240,000 ........
--------------------------------------------------------------------------------------------------------------------------------------------------------
*This column (interest accruing on the issue) contains the sums of the interest that accrues on each series in each bond year. The amount of interest
accruing on the issue is computed by adding the amount of interest accruing on each series outstanding for that bond year (the bottom number in the
line for each bond year). The amount of interest annually accruing on each series also is added to the purchase price of the series to determine the
amount of interest accruing in subsequent years, inasmuch as there are no payments with respect to the outstanding series prior to maturity. Thus, the
``principal'' amount, of the top of the two numbers given in such line for each bond year, is the purchase price allocable to that series plus the
amount of interest that accrued on that series in prior years.
[[Page 367]]
There are no imputed proceeds because the amount payable on the issue in
each bond year exceeds the total amount of interest accruing on the
issue during such bond year. Section 103(b)(1) does not apply to the
bonds unless such bonds are held by a person who is a substantial user
of the facility or a related person within the meaning of section
103(b)(13) and Sec. 1.103-11.
Example (5). On July 1, 1982, City C issues industrial development
bonds in the face amount of $30 million to construct a sports facility
described in section 103(b)(4)(B) to be leased to D, a nonexempt person,
with payments on the bonds secured by the lease. C receives $30 million
in exchange for the bonds which will be used to provide the facility.
The bonds mature on July 1, 2002. Each bond provides for an annual
interest payment equal to ten percent of the face amount of the bond,
with the last payment thereon (on July 1, 2002) including a return of
the principal amount of the bond. The proceeds of the issue are $30
million. Section 103(b)(1) does not apply to the bonds unless such bonds
are held by a person who is a substantial user of the facility or a
related person within the meaning of section 103(b)(13) and Sec. 1.103-
11.
Example (6). The facts are the same as example (5) except that each
bond provides for an annual interest payment equal to nine percent of
its face amount and is sold with the option to tender the bond to D for
purchase at par 5 years after the sale date of July 1, 1982 (i.e., the
bonds are sold with a ``put'' option). Such bonds also provide a put
option annually thereafter. There are no imputed proceeds (without
regard to Sec. 1.103-8(a)(7)), and the result is the same as example
(5).
Example (7). On July 1, 1982, City F sells an issue of industrial
development bonds in the face amount of $20 million to acquire a parking
facility as described in section 103(b)(4)(D). The estimated cost of the
facility is $17,800,000. The issue is issued on the same date and will
mature serially over the following ten years. Each bond that is part of
the issue bears annual interest coupons, each of which is in an amount
equal to ten percent of the face amount of the bond. Each maturity has a
face amount of $2,000,000. The issue is initially offered to the public
for $19,700,000, allocable to each maturity as follows:
------------------------------------------------------------------------
Purchase
Maturity price
------------------------------------------------------------------------
July 1, 1983............................................... $1,990,000
July 1, 1984............................................... $1,980,000
July 1, 1985............................................... $1,980,000
July 1, 1986............................................... $1,970,000
July 1, 1987............................................... $1,970,000
July 1, 1988............................................... $1,970,000
July 1, 1989............................................... $1,960,000
July 1, 1990............................................... $1,960,000
July 1, 1991............................................... $1,960,000
July 1, 1992............................................... $1,960,000
------------------------------------------------------------------------
Based on the foregoing issue proceeds equal $19,700,000 less issuance
costs. There are no imputed proceeds with respect to this issue inasmuch
as each bond pays interest at a constant rate in each bond year and the
purchase price of each bond is at least 95 percent of its face amount.
Substantially all of the proceeds are to be used to provide the exempt
facility. Accordingly, section 103(b)(1) does not apply to the bonds
unless such bonds are thereafter held by a person who is a substantial
user of the facility or a related person within the meaning of section
103(b)(13) and Sec. 1.103-11.
(b) Residential rental property--(1) General rule for obligations
issued after April 24, 1979. Section 103(b)(1) shall not apply to any
obligation which is issued after April 24, 1979, and is part of an issue
substantially all of the proceeds of which are to be used to provide a
residential rental project in which 20 percent or more of the units are
to be occupied by individuals or families of low or moderate income (as
defined in paragraph (b)(8)(v) of this section). In the case of a
targeted area project, the minimum percentage of units which are to be
occupied by individuals of low or moderate income is 15 percent. See
generally Sec. 1.103-7 for rules relating to refunding issues.
(2) Registration requirement. Any obligation (including any
refunding obligation) issued after December 31, 1981, to provide a
residential rental project must be issued as part of an issue, each
obligation of which is in registered form (as defined in paragraph
(b)(8)(ii) of this section).
(3) Transitional rule. For purposes of this section, obligations
issued after April 24, 1979, may be treated as issued before April 25,
1979, if the transitional requirements of section 1104 of the Mortgage
Subsidy Bond Tax Act of 1980 (94 Stat. 2670) are satisfied.
(4) Residential rental project. (i) In general. A residential rental
project is a building or structure, together with any functionally
related and subordinate facilities, containing one or more similarly
constructed units--
(a) Which are used on other than a transient basis, and
[[Page 368]]
(b) Which satisfy the requirements of paragraph (b)(5)(i) of this
section and are available to members of the general public in accordance
with the requirement of paragraph (a)(2) of this section.
Substantially all of each project must contain such units and
functionally related and subordinate facilities. Hotels, motels,
dormitories, fraternity and sorority houses, rooming houses, hospitals,
nursing homes, sanitariums, rest homes, and trailer parks and courts for
use on a transient basis are not residential rental projects.
(ii) Multiple buildings. (a) Proximate buildings or structures
(hereinafter ``buildings'') which have similarly constructed units are
treated as part of the same project if they are owned for Federal tax
purposes by the same person and if the buildings are financed pursuant
to a common plan.
(b) Buildings are proximate if they are located on a single tract of
land. The term ``tract'' means any parcel or parcels of land which are
contiguous except for the interposition of a road, street, stream or
similar property. Otherwise, parcels are contiguous if their boundaries
meet at one or more points.
(c) A common plan of financing exists if, for example, all such
buildings are provided by the same issue or several issues subject to a
common indenture.
(iii) Functionally related and subordinate facilities. Under
paragraph (a)(3) of this section, facilities that are functionally
related and subordinate to residential rental projects include
facilities for use by the tenants, for example, swimming pools, other
recreational facilities, parking areas, and other facilities which are
reasonably required for the project, for example, heating and cooling
equipment, trash disposal equipment or units for resident managers or
maintenance personnel.
(iv) Owner-occupied residences. For purposes of section 103
(b)(4)(A) and this paragraph (b), the term ``residential rental
project'' does not include any building or structure which contains
fewer than five units, one unit of which is occupied by an owner of the
units.
(5) Requirement must be continuously satisfied--(i) Rental
requirement. Once available for occupancy, each unit (as defined in
paragraph (b)(8)(i) of this section) in a residential rental project
must be rented or available for rental on a continuous basis during the
longer of--
(a) The remaining term of the obligation, or
(b) The qualified project period (as defined in paragraph (b)(7) of
this section).
(ii) Low or moderate income occupancy requirement. Individuals or
families of low or moderate income must occupy that percentage of
completed units in such project applicable to the project under
paragraph (b)(1) of this section continuously during the qualified
project period. For this purpose, a unit occupied by an individual or
family who at the commencement of the occupancy is of low or moderate
income is treated as occupied by such an individual or family during
their tenancy in such unit, even though they subsequently cease to be of
low or moderate income. Moreover, such unit is treated as occupied by an
individual or family of low or moderate income until reoccupied, other
than for a temporary period, at which time the character of the unit
shall be redetermined. In no event shall such temporary period exceed 31
days.
(6) Effect of post-issuance noncompliance--(i) In general. Unless
corrected within a reasonable period, noncompliance with the
requirements of this paragraph (b) shall cause the project to be treated
as other than a project described in section 103 (b)(4)(A) and this
paragraph (b) as of the date of issue. After an issue to provide such
project ceases to qualify, subsequent conformity with the requirements
will not alter the taxable status of such issue.
(ii) Correction of noncompliance. If the issuer corrects any
noncompliance arising from events occurring after the issuance of the
obligation within a reasonable period, such noncompliance (e.g., an
unauthorized sublease) shall not cause the project to be a project not
described in this paragraph (b). A reasonable period is at least 60 days
after such error is first discovered or would have been discovered by
the exercise of reasonable diligence.
[[Page 369]]
(iii) Involuntary loss. (a) The requirements of paragraph (b) shall
cease to apply to a project in the event of involuntary noncompliance
caused by fire, seizure, requisition, foreclosure, transfer of title by
deed in lieu of foreclosure, change in a Federal law or an action of a
Federal agency after the date of issue which prevents an issuer from
enforcing the requirements of this paragraph, or condemnation or similar
event but only if, within a reasonable period, either the obligation
used to provide such project is retired or amounts received as a
consequence of such event are used to provide a project which meets the
requirement of section 103 (b)(4)(A) and this paragraph (b).
(b) The provisions of paragraph (b)(6)(iii)(a) of this section shall
cease to apply to a project subject to foreclosure, transfer of title by
deed in lieu of foreclosure or similar event if, at anytime during that
part of the qualified project period subsequent to such event, the
obligor on the acquired purpose obligation (as defined in Sec. 1.103-
13(b)(4)(iv)(a)) or a related person (as defined in Sec. 1.103-10(e))
obtains an ownership interest in such project for tax purposes.
(7) Qualified project period. The term ``qualified project period''
means--
(i) For obligations issued after April 24, 1979, and prior to
September 4, 1982, a period of 20 years commencing on the later of the
date that the project becomes available for occupancy or the date of
issue of the obligations. The requirement of paragraph (b)(5)(ii) of
this section shall be deemed met if the owner of the project contracts
with a Federal or state agency to maintain at least 20 percent (or 15
percent in the case of targeted areas) of the units for low or moderate
income individuals or families (as defined in paragraph (b)(8)(v) of
this section) for 20 years in consideration for rent subsidies for such
individuals or families for such period.
(ii) For obligations issued after September 3, 1982, a period
beginning on the later of the first day on which at least 10 percent of
the units in the project are first occupied or the date of issue of an
obligation described in section 103(b)(4)(A) and this paragraph and
ending on the later of the date--
(a) Which is 10 years after the date on which at least 50 percent of
the units in the project are first occupied,
(b) Which is a qualified number of days after the date on which any
of the units in the project is first occupied, or
(c) On which any assistance provided with respect to the project
under section 8 of the United States Housing Act of 1937 terminates.
For purposes of this paragraph (b)(7)(ii), the term ``qualified number
of days'' means 50 percent of the total number of days comprising the
term of the obligation with the longest maturity in the issue used to
provide the project. In the case of a refunding of such an issue, the
longest maturity is equal to the sum of the period the prior issue was
outstanding and the longest term of any refunding obligations.
(8) Other definitions. For purposes of this paragraph--
(i) Unit. The term ``unit'' means any accommodation containing
separate and complete facilities for living, sleeping, eating, cooking,
and sanitation. Such accommodations may be served by centrally located
equipment, such as air conditioning or heating. Thus, for example, an
apartment containing a living area, a sleeping area, bathing and
sanitation facilities, and cooking facilities equipped with a cooking
range, refrigerator, and sink, all of which are separate and distinct
from other apartments, would constitute a unit.
(ii) In registered form. The term ``in registered form'' has the
same meaning as in section 6049. With respect to obligations issued
after December 31, 1982, such term shall have the same meaning as
prescribed in section 103(j) (including the regulations thereunder).
(iii) Targeted area project. The term ``targeted area project''
means a project located in a qualified census tract (as defined in
Sec. 6a.103A-2(b)(4)) or an area of chronic economic distress (as
defined in Sec. 6a.103A-2(b)(5)).
(iv) Building or structure. The term ``building or structure''
generally means a discrete edifice or other man-made construction
consisting of an independent foundation, outer walls, and roof. A single
unit which is not an
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entire building but is merely a part of a building is not a building or
structure within the meaning of this section. As such, while single
townhouses are not buildings if their foundation, outer walls, and roof
are not independent, detached houses and rowhouses are buildings.
(v) Low or moderate income. Individuals and families of low or
moderate income shall be determined in a manner consistent with
determinations of lower income families under section 8 of the United
States Housing Act of 1937, as amended, except that the percentage of
median gross income which qualifies as low or moderate income shall be
80 percent. Therefore, occupants of a unit are considered individuals or
families of low or moderate income only if their adjusted income
(computed in the manner prescribed with Sec. 1.167(k)-3(b)(3)) does not
exceed 80 percent of the median gross income for the area.
Notwithstanding the foregoing, the occupants of a unit shall not be
considered to be of low or moderate income if all the occupants are
students (as defined in section 151(e)(4)), no one of whom is entitled
to file a joint return under section 6013. The method of determining low
or moderate income in effect on the date of issue will be determinative
for such issue, even if such method is subsequently changed. In the
event programs under section 8(f) of the Housing Act of 1937, as
amended, are terminated prior to the date of issue, the applicable
method shall be that in effect immediately prior to the date of such
termination.
(9) Examples. The following examples illustrate the application of
this paragraph (b).
Example (1). In August 1982, City X issues $10 million of registered
bonds with a term of 20 years to be used to finance the construction of
an apartment building to be available to members of the general public.
X loans the proceeds of the bonds to Corporation M, the tax owner of the
project. The loan is secured by a promissory note from M and a mortgage
on the project. The mortgage requires annual payments sufficient to
amortize the principal and interest on the bonds. Corporation M
maintains 20 percent of the units in the project for low or moderate
income individuals and meets all of the requirements of this section
until 2002, at which time M converts the project to offices. The bonds
are industrial development bonds, but because the proceeds are used for
construction of residential rental property, which is an exempt facility
under section 103(b)(4)(A) and paragraph (b) of this section, section
103(b)(1) does not apply.
Example (2). The facts are the same as in example (1), except that
the building is constructed adjacent to a factory, and the factory
employees are to be given preference in selecting tenants. The bonds are
industrial development bonds and the facility is not an exempt facility
under section 103(b)(4)(A) and paragraph (b) of this section because it
is not a facility constructed for use by the general public.
Example (3). The facts are the same as in example (1), except that
the proceeds of the obligation are provided to N, a cooperative housing
corporation, to finance the construction of a cooperative housing
project. N sells stock in such cooperative to shareholders, some of whom
occupy the units in the cooperative and some of whom rent the units to
other persons. Such project is not a residential rental project within
the meaning of section 103(b)(4)(A) and Sec. 1.103-8(b) because less
than all of the units in the building are used for rental. Further, the
bonds are mortgage subsidy bonds under section 103A because more than a
significant portion of the proceeds are used to provide financing for
residences, some of which are owner-occupied and some of which are used
in the trade or business of rental.
Example (4). On February 1, 1984, County Z issues registered
obligations with a term of 3 years and loans the proceeds to Corporation
V to construct a garden apartment project for tenants who are 65 years
or older. The mortgage on the project secures the loan. At the end of 3
years, V obtains permanent financing for the project from a commercial
lender. The project is not a targeted area project. V has not contracted
with any Federal or State agency to provide rental assistance under
section 8 of the United States Housing Act of 1937. As a condition for
providing financing for construction, Z requires that the deed to the
project contain a covenant that requires the project be used for elderly
tenants and restricts occupancy of 20 percent of the units in the
project to individuals or families of low or moderate income. Further,
the deed provides that ``Such covenant shall run with and bind the land,
from the date that ten percent of the units in the project are first
occupied until ten years after the date that at least half the units are
first occupied. The right to enforce these restrictions is vested in
County Z.'' In 1990, however, less than 20 percent of the units are
occupied by families or individuals of low or moderate incomes, and
three months after learning of this condition County Z had not
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commenced enforcement of the covenant. Although on the date of issue the
proceeds of the obligation were used to provide a residential rental
project, the obligation will not be treated as providing a residential
rental project within the meaning of section 103(b)(4)(A) as of February
1, 1984, because the project did not meet the requirements of this
paragraph for at least 10 years after at least 50 percent of the units
are first occupied.
Example (5). On January 15, 1983, State X issues registered
obligations with a term of 15 years, the proceeds of which are loaned to
Corporation P to construct an apartment building. The project will be a
``targeted area project'', within the meaning of Sec. 1.103-
8(b)(8)(iii). Corporation P intends to rent all the units to individuals
for their residences, maintaining 15 percent of the units in the project
for individuals having low or moderate incomes, for 15 years. In 1988,
however, Corporation P converts 80 percent of the units to condominiums.
Corporation P repays the loan to State X which, in turn, redeems the
obligations. The obligations are not used to provide a residential
rental project within the meaning of section 103(b)(4)(A), and all the
interest paid or to be paid on such obligations will be includable in
gross income.
Example (6). On January 15, 1984, State Z issues registered
obligations with a term of 15 years the proceeds of which will be used
to acquire and renovate a residential apartment building. Z sells the
project to Corporation U and receives a 30-year mortgage. On June 1,
1985, the first occupants of the project commence their tenancies. At
least 50 percent of the units in the project are occupied on July 1,
1985. On January 15, 1988, Z issues 35-year refunding bonds the proceeds
of which are used to retire the obligations issued in 1984. The prior
issue will be discharged by March 15, 1988. In order to meet the
requirement of Sec. 1.103-8(b)(5)(ii), at least 20 percent of such units
must be occupied by individuals of low or moderate income until January
1, 2005.
Example (7). The facts are the same as in example (6) except that in
1987, the apartment building is substantially destroyed by fire. The
building was insured at its fair market value. U does not intend to
reconstruct the building but uses a portion of the insurance proceeds to
repay the unpaid balance of the mortgage. Z uses this amount to redeem
the outstanding bonds at the first available call date. Since the
project was substantially destroyed by fire and the outstanding bonds
are retired at the first available call date, the requirements of
section 103(b)(4)(A) and this paragraph (b) are satisfied with respect
to the obligations.
Example (8). The facts are the same as in example (6) except that in
1987 U defaults on the mortgage, and Z obtains title to the project
without instituting foreclosure proceedings. Z sells the project to S
and uses the proceeds to retire the outstanding bonds. Since S did not
obtain the project with obligations described in section 103(b)(4), S is
not required to meet the requirements of section 103(b)(4)(A) and this
paragraph. Further, the 1984 obligations are obligations described in
section 103(b)(4)(A).
Example (9). In September 1983, State W issues $10 million of
registered bonds with a term of 3 years, the proceeds of which are to be
loaned to Corporation V to finance the construction of an apartment
building in a rural community. At the end of 3 years, V obtains
permanent financing from Federal Agency T. Agency T will not allow the
deed to contain any restrictive covenant relating to the use of the
project. Under Federal law, however, T requires that V maintain all of
the units in the project for rental to low-income farmworkers for the
term of the mortgage, which is 20 years. Further, the mortgage between T
and V provides that if T determines that low-income housing is no longer
required in the community in which the project is constructed then the
repayment of the mortgage may be accelerated. T determines as of the
date of issue that low-income housing will be needed in the community
for at least 20 years. In 1987, the project fails to meet the
requirements of section 1.103-8(b)(5)(ii), relating to occupancy by
individuals or families of low or moderate income. Further, T does not
require V to correct the failure. Based on the foregoing, the bonds
issued by W will be treated as described in section 103(b)(4)(A).
Example (10). The facts are the same as in example (9) except that
in 1987, the Federal law is amended to provide that Agency T may not
enforce its low-income occupancy requirement. The result is the same.
Example (11). The facts are the same as in example (9) except that
in 1987 Agency T determines that due to a change in circumstances in the
community in which the project is located low-income rental housing is
no longer required. As such, T requires V to repay the mortgage. Since
the obligations have been repaid, W has no legal right to enforce the
requirements of paragraph (b) with respect to the project. Subsequent
nonconformity of the project with the requirements of Sec. 1.103-8(b)
under these circumstances will not cause the obligations issued by W to
be industrial development bonds within the meaning of section 103(b)(1).
(10) Obligations issued before April 25, 1979--(i) General rules.
Section 103(b)(1) shall not apply to obligations issued before April 25,
1979, which are part of an issue substantially all of the proceeds of
which are to be used to provide residential real property for family
units. In order to qualify under this
[[Page 372]]
paragraph (b) as an exempt facility, the facility must satisfy the
public use requirement of paragraph (a)(2) of this section by being
available for use by members of the general public.
(ii) Family units defined. For purposes of this paragraph (b) the
term ``family unit'' means a building or any portion thereof which
contains complete living facilities which are to be used on other than a
transient basis by one or more persons, and facilities functionally
related and subordinate thereto. Thus, an apartment which is to be used
on other than a transient basis as a residence by a single person or by
a family and which contains complete facilities for living, sleeping,
eating, cooking, and sanitation, constitutes a family unit. Such a unit
may be served by centrally located machinery and equipment as in a
typical apartment building. To qualify as a family unit, the living
facilities must be a separate, self-contained building or constitute one
unit in a building substantially all of which consists of similar units,
together with functionally related and subordinate facilities and areas.
Hotels, motels, dormitories, fraternity and sorority houses, rooming
houses, hospitals, sanitariums, rest homes, and trailer parks and courts
for use on a transient basis do not constitute residential real property
for family units.
(iii) Functionally related and subordinate facilities. Under
paragraph (a)(3) of this section, facilities which are functionally
related and subordinate to residential real property actually used for
family units include, for example, facilities for use by the occupants
such as a swimming pool, a parking area, and recreational facilities.
(c) Sports facilities--(1) General rule. Section 103(b)(4)(B)
provides that section 103(b)(1) shall not apply to obligations issued by
a State or local governmental unit which are part of an issue
substantially all of the proceeds of which are to be used to provide
sports facilities. In order to qualify as an exempt facility under
section 103(b)(4)(B) and this paragraph, the facility must satisfy the
public use requirement of paragraph (a)(2) of this section by being
available for use by members of the general public either as
participants or as spectators.
(2) Sports facility defined. (i) For purposes of section
103(b)(4)(B) and this paragraph, the term ``sports facilities'' includes
both outdoor and indoor facilities. The facility may be designed either
as a spectator or as a participation facility. For example, the term
includes both indoor and outdoor stadiums for baseball, football, ice
hockey, or other sports events, as well as facilities for the
participation of the general public in sports activities, such as golf
courses, ski slopes, swimming pools, tennis courts, and gymnasiums. The
term does not include, however, facilities such as a golf course,
swimming pool, or tennis court, which are constructed for use by members
of a private club or as integral or subordinate parts of a hotel or
motel, or the use of which will be restricted to a special class or
group or to guests of a particular hotel or motel, since they are not
facilities for the use of the general public as required by paragraph
(a)(2) of this section.
(ii) Under paragraph (a)(3) of this section, facilities which are
functionally related and subordinate to a sports facility, such as a
parking lot, clubhouse, ski slope warming house, bath house, or ski tow,
are considered to be part of a sports facility. A ski lodge which
consists primarily of overnight accommodations is not functionally
related and subordinate to a sports facility.
(d) Convention or trade show facilities--(1) General rule. Section
103(b)(4)(C) provides that section 103(b)(1) shall not apply to
obligations issued by a State or local governmental unit which are a
part of an issue substantially all of the proceeds of which are to be
used to provide convention or trade show facilities. In order to qualify
under section 103(b)(4)(C) and this paragraph as an exempt facility, the
facility must satisfy the public use requirement of paragraph (a)(2) of
this section by being available for an appropriate charge or rental, on
a rate scale basis, for use by members of the general public. The public
use requirement is not satisfied if the use of a convention or trade
show facility is limited by long-term leases to a single user or group
of users.
(2) Convention or trade show facilities defined. For purposes of
section 103(b)(4)(C) and this paragraph, the
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term ``convention or trade show facilities'' means special-purpose
buildings or structures, such as meeting halls and display areas, which
are generally used to house a convention or trade show, including, under
paragraph (a)(3) of this section, facilities functionally related and
subordinate to such facilities such as parking lots or railroad sidings.
A hotel or motel which is available to the general public, whether or
not it is intended primarily to house persons attending or participating
in a convention or trade show, is neither a convention or trade show
facility nor functionally related and subordinate thereto.
(e) Certain transportation facilities--(1) General rule. Section
103(b)(4)(D) provides that section 103(b)(1) shall not apply to
obligations issued by a State or local governmental unit which are part
of an issue substantially all of the proceeds of which are to be used to
provide (i) airports, docks, wharves, mass commuting facilities, or
public parking facilities, or (ii) storage or training facilities
directly related to any such facility. In order to qualify under section
103(b)(4)(D) and this paragraph as an exempt facility, the facility must
satisfy the public use requirement of paragraph (a)(2) of this section
by being available for use by members of the general public or for use
by common carriers or charter carriers which serve members of the
general public. A dock or wharf which is part of a public port (or a
public port to be constructed in accordance with a plan which has been
finally adopted on the date the obligations in question are issued)
satisfies the public use test. A parking lot will be available for use
by the general public unless more than an insubstantial portion thereof
will be used exclusively by or for the benefit of a nonexempt person by
reason of a formal or informal agreement or by reason of the remote
geographic location of the facility.
(2) Definitions. For purposes of section 103(b)(4)(D) and this
paragraph--
(i) With respect to bonds sold at or before 5:00 p.m. EST on
December 29, 1978, an airport includes service accommodations for the
public such as terminals, retail stores in such terminals, runways,
hangars, loading facilities, repair shops, parking areas, and facilities
which, under paragraph (a)(3) of this section, are functionally related
and subordinate to the airport, such as facilities for the preparation
of in-flight meals, restaurants, and accommodations for temporary or
overnight use by passengers, and other facilities functionally related
to the needs or convenience of passengers, shipping companies, and
airlines. The term ``airport'' does not include a landing strip which,
by reason of a formal or informal agreement, or by reason of geographic
location, will not be available for general public use.
(ii) With respect to bonds sold after 5:00 p.m. EST on December 29,
1978--
(a) An airport includes facilities which are directly related and
essential to--
(1) Servicing aircraft or enabling aircraft to take off and land, or
(2) Transferring passengers or cargo to or from aircraft.
A facility does not satisfy either of the foregoing requirements if the
facility need not be located at, or in close proximity to, the take-off
and landing area in order to perform its function. Examples of
facilities which satisfy those requirements are terminals, runways,
hangars, loading facilities, repair shops, and land-based navigation
aids such as radar installation.
(b) Under paragraph (a)(3) of this section, an airport includes
facilities other than those described in paragraph (e)(2)(ii)(a) only if
they are functionally related and subordinate to an airport (as defined
in paragraph (e)(2)(ii)(a)). A facility (or part thereof) is not
functionally related and subordinate to an airport if the facility (or
part thereof)--
(1) Is not of a character and size commensurate with the character
and size of the airport at or adjacent to which the facility is located,
or
(2) Is not located at or adjacent to that airport.
A facility may satisfy the character and size requirement although it
provides minimal benefits to other airports. For example, a facility for
the preparation of in-flight meals which has capacity sufficient to
prepare all in-flight meals for aircraft departing the airport where the
facility is located
[[Page 374]]
qualifies although some meals may be consumed in transit between other
airports. Other examples of facilities functionally related and
subordinate to an airport are restaurants and retail stores located in
terminals, ground transportation parking areas, and accommodations for
temporary or overnight use by passengers. Unimproved land (including
agricultural land) that is adjacent to an airport and that is impaired
by a significant level of airport noise is functionally related and
subordinate to the airport if after its acquisition that land will not
be converted to a use that is incompatible with the level of airport
noise. Adjacent land with existing improvements also may be functionally
related and subordinate to an airport by reason of impairment by a
significant level of airport noise but only if the use of such land
before its acquisition is incompatible with the airport noise level, its
use after acquisition is to be compatible, and the post-acquisition use
will be essentially different from the pre-acquisition use.
Notwithstanding the foregoing, an interest in such improved land
acquired solely to mitigate damages attributable to airport noise is
treated as functionally related and subordinate to the airport. Thus,
for example, amounts allocated to imposing a servitude on improved land
adjacent to an airport restricting its future use to uses compatible
with airport noise are treated as amounts allocated to property
functionally related and subordinate to an airport. For the purpose of
determining whether land is impaired by a significant level of airport
noise, any generally accepted noise estimating methodology may be used.
For example, a Noise Exposure Forecast (NEF), a method for composite
noise rating recommended by the Federal Aviation Administration to
measure the impact of airport noise, may be used for this purpose.
Compatibility may be determined by reference to regulations or general
guidelines published by the Federal Aviation Administration under
section 102 of the Aviation Safety and Noise Abatement Act of 1979 (49
U.S.C. 2102), or sections 11(3)(C) and 18(a)(4) of the Airport and
Airway Development Act of 1970, as amended (49 U.S.C. 1711(3)(C) and
1718(a)(4)), concerning uses of land impaired by a significant level of
airport noise, or, where available, by reference to the airport
compatibility plan specifically addressing what constitutes a compatible
use of that land.
(c) As an illustration of the rules of this paragraph (e)(2)(ii), an
office building (or office space within a building) or a computer
facility, either of which serves a system-wide or regional function of
an airline, is not considered part of an airport since that facility is
not described in either paragraph (e)(2)(ii)(a) or (b). However, a
maintenance or overhaul facility which services aircraft is considered
part of an airport under paragraph (e)(2)(ii)(a) since that facility is
directly related and essential to servicing aircraft and must be located
where aircraft take off and land in order to perform its function.
(d) A hotel located at or adjacent to an airport satisfies the
requirements of paragraph (e)(2)(ii)(b), that is, it is of a character
and size commensurate with the character and size of the airport at or
adjacent to which it is located, if the number of guest rooms in the
hotel is reasonable for the size of the airport, taking into account the
current and projected passenger usage of the terminal facility. If the
hotel contains meeting rooms, the number and size of these rooms must be
in reasonable proportion to the number of guest rooms in the hotel.
Limited recreational facilities will not prevent the hotel from being of
a character and size commensurate with the character and size of the
airport.
(iii) A dock or wharf includes property which, under paragraph
(a)(3) of this section, is functionally related and subordinate to a
dock or wharf such as the structure alongside which a vessel docks, the
equipment needed to receive and to discharge cargo and passengers from
the vessel, such as cranes and conveyors, related storage, handling,
office, and passenger areas, and similar facilities.
(iv) A mass commuting facility includes real property together with
improvements and personal property used therein, such as machinery,
equipment, and furniture, serving the general public commuting on a day-
to-day basis by
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bus, subway, rail, ferry, or other conveyance which moves over
prescribed routes. Such property also includes terminals and facilities
which, under paragraph (a)(3) of this section, are functionally related
and subordinate to the mass commuting facility, such as parking garages,
car barns, and repair shops. Use of mass commuting facilities by
noncommuters in common with commuters is immaterial. Thus, a terminal
leased to a common carrier bus line which serves both commuters and long
distance travelers would qualify as an exempt facility.
(3) Related storage or training facility. Section 103 (b)(4)(D)
includes only those storage and training facilities which are both (i)
directly related to a facility to which subparagraph (1)(i) or (ii) of
this paragraph applies and (ii) physically located on or adjacent to
such a facility. For example, a storage facility would include a grain
elevator, silo, warehouse, or oil and gas storage tank used in
connection with a dock or wharf and located on or adjacent to such dock
or wharf. Similarly, a training facility would include a building
located at or adjacent to an airport for the training of flight
personnel or a paved area immediately adjoining a bus garage used to
train bus drivers.
(4) Examples. The principles of this paragraph may be illustrated by
the following examples:
Example (1). B Airport Authority, a political subdivision of State
A, owns and operates B Airport. B Airport Authority adds several
runways. In view of the expanded area impaired by significant levels of
airport noise, the Authority proposes to issue bonds the proceeds of
which are to be used to acquire a hospital located adjacent to the
airport. The noise level on the acquired property is 40 NEF. By
reference to a noise exposure map setting forth noncompatible land uses
and by reference to guidelines published by the Federal Aviation
Administration, it is established that continued use of the land for a
hospital is not compatible with the noise level. Prior to issuing the
bonds, B contracts to lease the property to Corporation C to be used for
warehouse space. Within 18 months of the bonds' issuance C will remodel
the hospital (previously owned by D, who is unrelated to C) with its own
funds and rent the facility as a warehouse. Use as a warehouse is
determined to be compatible with the level of airport noise impairing
the land. The improved land and prospective revenues from the facility's
rental are security for the proposed issuance. Based on the foregoing,
the acquired land satisfies the public use test. Furthermore, it is
functionally related and subordinate to the airport because the
improvements are to be used in an essentially different manner than
prior to the land's acquisition. The bonds are industrial development
bonds. However, section 103(b)(1) does not apply unless the provisions
of section 103(b)(13) and Sec. 1.103-11 apply.
Example (2). The facts are the same as in Example (1) except that a
substantial portion of the proceeds of the bond issue is allocated to
the acquisition of a limited interest in an additional tract of land
(also impaired by airport noise measured at 40 NEF) on which an office
building stands. The limited interest holds B harmless for damages
caused by airport noise and restricts uses of the tract after the
building is retired to those compatible with noise levels caused by the
airport. Based on the foregoing, such interest satisfies the public use
test. Furthermore, the interest is functionally related and subordinate
to the airport because it is solely to mitigate damage attributable to
airport noise, in part by restricting future land uses. The bonds are
industrial development bonds. However, section 103(b)(1) does not apply
unless the provisions of section 103(b)(13) or Sec. 1.103-11 apply.
Example (3). On June 1, 1982, M Airport Authority, a political
subdivision of State O, issues obligations, the proceeds of which are
loaned to X Corporation, a nonexempt person. X uses the proceeds to
construct a hotel adjacent to the main terminal building at M Airport. X
will be unconditionally liable for repayment of the proposed
obligations. The hotel will be used to provide temporary and overnight
accommodations for airline passengers using M Airport. The number of
rooms in the hotel is reasonable for an airport of M's size, taking into
account the current and projected passenger usage of the terminal
facility. In addition to guest rooms, the hotel will contain a
restaurant, small retail stores (such as a gift shop and newstand), and
limited recreation facilities (such as a swimming pool). The hotel will
also contain several multipurpose rooms suitable for use as meeting
rooms. The number and size of these rooms will be in reasonable
proportion to the number and size of the guest rooms in the hotel. Use
of the guest rooms, restaurant and stores, recreational facilities, and
meeting rooms by air passengers arriving at or departing from M Airport
will be incidental to the use of the hotel by air passengers for
temporary and overnight accommodations. The hotel is of a character and
size commensurate with the character and size of M Airport.
Consequently, applying the provisions of Sec. 1.103-8(e)(2), the hotel
is functionally related and subordinate to M Airport. The obligations
are industrial development bonds. Section
[[Page 376]]
103(b)(1) does not apply to the obligations, however, unless the
provisions of section 103(b)(10) and Sec. 1.103-11 apply.
Example (4). On June 1, 1982, N Airport Authority, a political
subdivision of State P, issues obligations the proceeds of which are
loaned to Y Corporation, a nonexempt person. Y uses the proceeds to
construct a hotel adjacent to the main terminal building at N Airport. Y
Corporation will be unconditionally liable for repayment of the proposed
obligations. The hotel will contain extensive recreational facilities,
including a large roof-top swimming pool, tennis courts, and a health
club. In addition, facilities for conferences consisting of a ballroom-
sized meeting room capable of being partitioned by movable panels and
several smaller meeting rooms will be constructed. The number of rooms
in the hotel will substantially exceed the number which is reasonably
based on the current and projected passenger usage of the terminal
facility. Because of the presence of extensive recreational and
conference facilities, as well as the presence of on excessive number of
rooms at the hotel, the hotel fails to be of a character and size
commensurate with the character and size of N Airport. The result would
be the same if the hotel did not have extensive recreational facilities.
Consequently, the hotel is not functionally related and subordinate to N
Airport under Sec. 1.103-8(e)(2). The obligations are industrial
development bonds and interest thereon is not excluded from gross income
by reason of subsection (a)(1) or (b)(4) of section 103.
(f) Certain public utility facilities--(1) General rule. (i) Section
103(b)(4)(E) provides that section 103(b)(1) shall not apply to
obligations issued by a State or local governmental unit which are part
of an issue substantially all of the proceeds of which are to be used to
provide sewage disposal facilities, solid waste disposal facilities, or
facilities for the local furnishing of electric energy or gas. In order
to qualify under section 103(b)(4)(E) as an exempt facility, the
facility must satisfy the public use requirement of paragraph (a)(2) of
this section. A public utility facility described in this subparagraph
(with the exception of sewage and solid waste disposal facilities which
will be treated in all events as serving the general public) will
satisfy the public use requirement only if such facility, or the output
thereof, is available for use by members of the general public.
(ii) A facility for the local furnishing of electric energy or gas
is, for purposes of applying the public use test in paragraph (a)(2) of
this section, available for use by members of the general public if (a)
the owner or operator of the facility is obligated, by a legislative
enactment, local ordinance, regulation, or the equivalent thereof, to
furnish electric energy or gas to all persons who desire such services
and who are within the service area of the owner or operator of such
facility, and (b) it is reasonably expected that such facility will
serve or be available to a large segment of the general public in such
service area. For rules with respect to facilities for the furnishing of
water, see paragraph (h) of this section.
(2) Definitions. For purposes of section 103(b)(4)(E) and this
paragraph--
(i) The term ``sewage disposal facilities'' means any property used
for the collection, storage, treatment, utilization, processing, or
final disposal of sewage.
(ii)(a) The term ``solid waste disposal facilities'' means any
property or portion thereof used for the collection, storage, treatment,
utilization, processing, or final disposal of solid waste. Only
expenditures for that portion of property which is a solid waste
disposal facility qualify as expenditures for solid waste disposal
facilities. The fact that a facility which otherwise qualifies as a
solid waste disposal facility operates at a profit will not, of itself,
disqualify the facility as an exempt facility. However, whether a
collection or storage facility qualifies as a solid waste disposal
facility depends upon all of the facts and circumstances. Thus, land and
facilities for the collection of materials to form a slag heap which is
not preliminary to the recycling or other final disposal of such
materials within a reasonable period of time will not qualify. The term
does not include facilities for collection, storage, or disposal of
liquid or gaseous waste except where such facilities are facilities
which, under paragraph (a)(3) of this section, are functionally related
and subordinate to a solid waste disposal facility.
(b) The term ``solid waste'' shall have the same meaning as in
section 203(4) of the Solid Waste Disposal Act (42 U.S.C. 3252(4)),
except that for purposes of this paragraph, material will not qualify as
solid waste unless, on the date of issue of the obligations issued
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to provide the facility to dispose of such waste material, it is
property which is useless, unused, unwanted, or discarded solid
material, which has no market or other value at the place where it is
located. Thus, where any person is willing to purchase such property, at
any price, such material is not waste. Where any person is willing to
remove such property at his own expense but is not willing to purchase
such property at any price, such material is waste. Section 203(4) of
the Solid Waste Disposal Act provides that:
(4) The term ``solid waste'' means garbage, refuse, and other
discarded solid materials, including solid-waste materials resulting
from industrial, commercial, and agricultural operations, and from
community activities, but does not include solids or dissolved material
in domestic sewage or other significant pollutants in water resources,
such as silt, dissolved or suspended solids in industrial waste water
effluents, dissolved materials in irrigation return flows or other
common water pollutants.
(c) A facility which disposes of solid waste by reconstituting,
converting, or otherwise recycling it into material which is not waste
shall also qualify as a solid waste disposal facility if solid waste
(within the meaning of (b) of this subdivision (ii) constitutes at least
65 percent, by weight or volume, of the total materials introduced into
the recycling process. Such a recycling facility shall not fail to
qualify as a solid waste disposal facility solely because it operates at
a profit.
(d) For rules relating to property which has both a solid waste
disposal function and a function other than the disposal of solid waste,
see Sec. 17.1 of this chapter.
(iii) The term ``facilities for the local furnishing of electric
energy or gas'' means property which--
(a) Is either property of a character subject to the allowance for
depreciation provided in section 167 or land,
(b) Is used to produce, collect, generate, transmit, store,
distribute, or convey electric energy or gas.
(c) Is used in the trade or business of furnishing electric energy
or gas, and
(d) Is a part of a system providing service to the general populace
of one or more communities or municipalities, but in no event more than
2 contiguous counties (or a political equivalent) whether or not such
counties are located in one State.
For purposes of this subdivision, a city which is not within, or does
not consist of, one or more counties (or a political equivalent) shall
be treated as a county (or a political equivalent). A facility for the
generation of electric energy otherwise qualifying under this
subdivision will not be disqualified because it is connected to a system
for interconnection with other public utility systems for the emergency
transfer of electric energy. The facilities need not be located in the
area served by them. Also, the term ``facilities for the local
furnishing of electric energy or gas'' does not include coal, oil, gas,
nuclear cores, or other materials performing a similar function.
(g) Air or water pollution control facilities--(1) General rule.
Section 103(b)(4)(F) provides that section 103(b)(1) shall not apply to
obligations issued by a State or local governmental unit which are part
of an issue substantially all of the proceeds of which are to be used to
provide air or water pollution control facilities. Such facilities are
in all events treated as serving the general public and, thus, satisfy
the public use requirement of paragraph (a)(2) of this section.
(2) Definitions. (i) For purposes of section 103(b)(4)(F) and this
paragraph, property is a pollution control facility to the extent that
the test of either subdivision (iii) or (iv) of this subparagraph is
satisfied, but only if--
(a) It is property which is described in subdivision (ii) of this
subparagraph and is either of a character subject to the allowance for
depreciation provided in section 167 or land, and
(b) Either (1) a Federal, State, or local agency exercising
jurisdiction has certified that the facility, as designed, is in
furtherance of the purpose of abating or controlling atmospheric
pollutants or contaminants, or water pollution, as the case may be, or
(2) the facility is designed to meet or exceed applicable Federal,
State, and local requirements for the control of atmospheric pollutants
or contaminants, or water pollution, as the case may be, in effect at
the time the obligations, the proceeds of which are to be used to
provide such facilities, are issued.
[[Page 378]]
(ii) Property is described in this subdivision if it is property to
be used, in whole or in part, to abate or control water or atmospheric
pollution or contamination by removing, altering, disposing, or storing
pollutants, contaminants, wastes, or heat. In the case of property to be
used to control water pollution, such property includes the necessary
intercepting sewers, pumping, power, and other equipment, and their
appurtenances. For rules relating to facilities which remove pollutants
from fuel or certain other items, see subdivision (vi) of this
subparagraph.
(iii) In the case of an expenditure for property which is designed
for no significant purpose other than the control of pollution, the
total expenditure for such property satisfies the test of this
subdivision. Thus, where property which is to serve no function other
than the control of pollution is to be added to an existing
manufacturing or production facility, the total expenditure for such
property satisfies the test of this subdivision. Also, if an expenditure
for property would not be made but for the purpose of controlling
pollution, and if the expenditure has no significant purpose other than
the purpose of pollution control, the total expenditure for such
property satisfies the test of this subdivision even though such
property serves one or more functions in addition to its function as a
pollution control facility.
(iv) In the case of property to be placed in service for the purpose
of controlling pollution and for a significant purpose other than
controlling pollution, only the incremental cost of such facility
satisfies the test of this subdivision. The ``incremental cost'' of
property is the excess of its total cost over that portion of its cost
expended for a purpose other than the control of pollution.
(v) An expenditure has a significant purpose other than the control
of pollution if it results in an increase in production or capacity, or
in a material extension of the useful life of a manufacturing or
production facility or a part thereof.
(h) Water facilities--(1) General rule. Section 103(b)(4)(G)
provides that section 103(b)(1) shall not apply to obligations issued by
a State or local governmental unit which are part of an issue
substantially all of the proceeds of which are to be used to provide
facilities for the furnishing of water which are available, on
reasonable demand, to members of the general public. A water facility
will satisfy the public use test of paragraph (a)(2) of this section if
it will provide water, on reasonable demand, to any member of the
general public within the service area of the water system of which such
facility is a part.
(2) Definition. For purposes of section 103(b)(4)(G) and this
paragraph, the ``water facilities'' include artesian wells, reservoirs,
dams, related equipment and pipelines, and other facilities used to
furnish water for domestic, industrial, irrigation, or other purposes.
(3) Effective date. The provisions of this paragraph apply in the
case of facilities provided by obligations issued after January 1, 1969.
In the case of facilities provided by obligations issued on or before
such date to which section 103(b) is applicable, the provisions of
paragraph (f) of this section shall apply. For such purposes, wherever
the term ``local furnishing of electric energy or gas'' appears in
paragraph (f) of this section, such term shall be deemed to read ``local
furnishing of electric energy, gas, or water.''
(i) Examples. The application of section 103(b)(4) and this section
are illustrated by the following examples:
Example (1). City B plans to issue $10 million of bonds to be used
to construct a sports stadium. The revenues from the facility and the
facility itself will be the security for the bonds. A professional
football team rents the facility on a long-term leasee for part of the
year and a professional baseball team rents the sports facility for the
remainder of the year. Tickets are sold by the teams to the general
public. The bonds are industrial development bonds, but since the
proceeds are used for a spectator facility for general public use, which
is an exempt facility under section 103(b)(4)(B) and paragraph (c) of
this section, section 103(b)(1) does not apply unless the provisions of
section 103(b)(13) and Sec. 1.103-11 apply.
Example (2). City C plans to issue $10 million of bonds to be used
to construct a convention hall which it will own. City C plans to lease
the convention hall for 25 years to corporation Y, a nonexempt person,
which will operate and maintain it. The terms of the lease obligate Y to
make the convention
[[Page 379]]
hall generally available for civic, business, and recreational shows,
meetings, performances, and similar activities serving or benefiting the
community. Lease payments from Y and the facility will be security for
the bonds. The bonds are industrial development bonds, but since the
proceeds are to be used for a facility for general public use, which is
an exempt facility under section 103(b)(4)(C) and paragraph (d) of this
section, section 103(b)(1) does not apply unless the provisions of
section 103(b)(13) and Sec. 1.103-11 apply.
Example (3). City D issues $100 million of its bonds and uses the
proceeds to finance construction of an airport for the use of the
general public. D will own and operate the airport. A major portion of
the rentable space in the terminal building is leased on a long-term
basis to common carrier and non-scheduled airlines. The bonds will be
secured by the airport landing and runway charges and by payments with
respect to such long-term leases from such commercial airlines. Such
commercial airline payments are expected to constitute more than 50
percent of the total revenues from the airport. The bonds are industrial
development bonds, but since the proceeds are to be used for an airport
for use by the general public and by carriers serving the general
public, which is an exempt facility under section 103(b)(4)(D) and
paragraph (e) of this section, section 103(b)(1) does not apply unless
the provisions of section 103(b)(13) and Sec. 1.103-11 apply. The result
would be the same if D hired an airport management firm to operate the
airport.
Example (4). City E issues $6 million of its bonds and uses the
proceeds to finance construction of a landing strip for airplanes to be
located adjacent to the factories of corporations Y and Z. The landing
strip will be used in the trades or businesses of Y and Z and by any
member of the general public wishing to use it. However, due to its
location, general public use will be negligible. The lease payments by Y
and Z for the use of the facility are the security for the bonds. The
bonds are industrial development bonds and the facility is not an exempt
facility under section 103(b)(4)(D) and paragraph (c) of this section
because it is not a facility constructed for general public use.
Example (5). State F and corporation Z enter into an arrangement
which provides that F will issue $10 million of its bonds and use the
proceeds to construct a facility for Z the only purpose of which is to
control air and water pollution at Z's plant. The principal and interest
on the bonds will be secured by the charges which F will impose on Z.
The bonds are industrial development bonds, but since the proceeds are
to be used for air and water pollution facilities designed to abate
pollution by private persons, such facilities are for the benefit of the
general public and are exempt facilities under section 103(b)(4)(F) and
paragraph (g) of this section. Accordingly, section 103(b)(1) does not
apply unless the provisions of section 103(b)(13) and Sec. 1.103-11
apply.
Example (6). City G issues $20 million of its bonds and will use $6
million to finance residential rental property which qualifies as an
exempt facility under section 103(b)(4)(A) and paragraph (b) of this
section, $9 million to finance construction of a stadium which qualifies
as an exempt facility under section 103(b)(4)(B) and paragraph (c) of
this section, and $5 million for convention facilities which qualify as
exempt facilities under section 103(b)(4)(C) and paragraph (d) of this
section. The facilities will be used in the trades or businesses of
nonexempt persons and rental payments with respect to such facilities
and the facilities themselves will be the security for the bonds. The
bonds are industrial development bonds, but since all the proceeds are
to be used for facilities which are exempt facilities under section
103(b)(4), section 103(b)(1) does not apply unless the provisions of
section 103(b)(10) and Sec. 1.103-11 apply. The result would be the
same, if; instead of using $9 million to finance construction of a
stadium, the $9 million were used to finance construction of a capitol
building. [Reg. Sec. 1.103-8].
[T.D. 7199, 37 FR 15490, Aug. 3, 1972]
Editorial Note: For Federal Register citations affecting Sec. 1.103-
8, see the List of CFR Sections Affected, which appears in the Finding
Aids section of the printed volume and on GPO Access.