[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: 26CFR1.142-2]

[Page 649]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.142-2  Remedial actions.

    (a) General rule. If less than 95 percent of the net proceeds of an 
exempt facility bond are actually used to provide an exempt facility, 
and for no other purpose, the issue will be treated as meeting the use 
of proceeds requirement of section 142(a) if the issue meets the 
condition of paragraph (b) of this section and the issuer takes the 
remedial action described in paragraph (c) of this section.
    (b) Reasonable expectations requirement. The issuer must have 
reasonably expected on the issue date that 95 percent of the net 
proceeds of the issue would be used to provide an exempt facility and 
for no other purpose for the entire term of the bonds (disregarding any 
redemption provisions). To meet this condition the amount of the issue 
must have been based on reasonable estimates about the cost of the 
facility.
    (c) Redemption or defeasance--(1) In general. The requirements of 
this paragraph (c) are met if all of the nonqualified bonds of the issue 
are redeemed on the earliest call date after the date on which the 
failure to properly use the proceeds occurs under paragraph (d) of this 
section. Proceeds of tax-exempt bonds (other than those described in 
paragraph (d)(1) of this section) must not be used for this purpose. If 
the bonds are not redeemed within 90 days of the date on which the 
failure to properly use proceeds occurs, a defeasance escrow must be 
established for those bonds within 90 days of that date.
    (2) Notice of defeasance. The issuer must provide written notice to 
the Commissioner of the establishment of the defeasance escrow within 90 
days of the date the escrow is established.
    (3) Special limitation. The establishment of a defeasance escrow 
does not satisfy the requirements of this paragraph (c) if the period 
between the issue date and the first call date is more than 10\1/2\ 
years.
    (4) Special rule for dispositions of personal property. For 
dispositions of personal property exclusively for cash, the requirements 
of this paragraph (c) are met if the issuer expends the disposition 
proceeds within 6 months of the date of the disposition to acquire 
replacement property for the same qualifying purpose of the issue under 
section 142.
    (5) Definitions. For purposes of paragraph (c)(4) of this section, 
disposition proceeds means disposition proceeds as defined in 
Sec. 1.141-12(c).
    (d) When a failure to properly use proceeds occurs--(1) Proceeds not 
spent. For net proceeds that are not spent, a failure to properly use 
proceeds occurs on the earlier of the date on which the issuer 
reasonably determines that the financed facility will not be completed 
or the date on which the financed facility is placed in service.
    (2) Proceeds spent. For net proceeds that are spent, a failure to 
properly use proceeds occurs on the date on which an action is taken 
that causes the bonds not to be used for the qualifying purpose for 
which the bonds were issued.
    (e) Nonqualified bonds. For purposes of this section, the 
nonqualified bonds are a portion of the outstanding bonds in an amount 
that, if the remaining bonds were issued on the date on which the 
failure to properly use the proceeds occurs, at least 95 percent of the 
net proceeds of the remaining bonds would be used to provide an exempt 
facility. If no proceeds have been spent to provide an exempt facility, 
all of the outstanding bonds are nonqualified bonds. The nonqualified 
bonds must be determined on a pro rata allocation basis, except that an 
issuer may treat bonds with longer maturities (determined on a bond-by-
bond basis) as the nonqualified bonds.

[T.D. 8712, 62 FR 2302, Jan. 16, 1997]

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