[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: 26CFR1.148-1]
[Page 658-663]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1--INCOME TAXES--Table of Contents
Sec. 1.148-1 Definitions and elections.
(a) In general. The definitions in this section and the definitions
under section 150 apply for purposes of section 148 and Secs. 1.148-1
through 1.148-11.
(b) Certain definitions. The following definitions apply:
Accounting method means both the overall method used to account for
gross proceeds of an issue (e.g., the cash method or a modified accrual
method) and the method used to account for or allocate any particular
item within that overall accounting method (e.g., accounting for
investments, expenditures, allocations to and from different sources,
and particular items of the foregoing).
Annuity contract means annuity contract as defined in section 72.
Available amount means available amount as defined in Sec. 1.148-
6(d)(3)(iii).
Bona fide debt service fund means a fund, which may include proceeds
of an issue, that--
(1) Is used primarily to achieve a proper matching of revenues with
principal and interest payments within each bond year; and
(2) Is depleted at least once each bond year, except for a
reasonable carryover amount not to exceed the greater of:
(i) the earnings on the fund for the immediately preceding bond
year; or
(ii) one-twelfth of the principal and interest payments on the issue
for the immediately preceding bond year.
Bond year means, in reference to an issue, each 1-year period that
ends on the day selected by the issuer. The first and last bond years
may be short periods. If no day is selected by the issuer before the
earlier of the final maturity date of the issue or the date that is 5
years after the issue date, bond years end on each anniversary of the
issue date and on the final maturity date.
Capital project or capital projects means all capital expenditures,
plus related working capital expenditures to which the de minimis rule
under Sec. 1.148-6(d)(3)(ii)(A) applies, that carry out the governmental
purposes of an issue. For example, a capital project may include capital
expenditures for one or more buildings, plus related start-up operating
costs.
Commingled fund means any fund or account containing both gross
proceeds of an issue and amounts in excess of $25,000 that are not gross
proceeds of that issue if the amounts in the fund or account are
invested and accounted for collectively, without regard to the source of
funds deposited in the fund or account. An open-end regulated investment
company under section 851, however, is not a commingled fund.
Computation date means each date on which the rebate amount for an
issue is computed under Sec. 1.148-3(e).
Computation period means the period between computation dates. The
first computation period begins on the issue date and ends on the first
computation date. Each succeeding computation period begins on the date
immediately following the computation date and ends on the next
computation date.
Consistently applied means applied uniformly within a fiscal period
and between fiscal periods to account for gross proceeds of an issue and
any amounts that are in a commingled fund.
De minimis amount means--
[[Page 659]]
(1) In reference to original issue discount (as defined in section
1273(a)(1)) or premium on an obligation--
(i) An amount that does not exceed 2 percent multiplied by the
stated redemption price at maturity; plus
(ii) Any original issue premium that is attributable exclusively to
reasonable underwriters' compensation; and
(2) In reference to market discount (as defined in section
1278(a)(2)(A)) or premium on an obligation, an amount that does not
exceed 2 percent multiplied by the stated redemption price at maturity.
Economic accrual method (also known as the constant interest method
or actuarial method) means the method of computing yield that is based
on the compounding of interest at the end of each compounding period.
Fair market value means fair market value as defined in Sec. 1.148-
5(d)(6).
Fixed rate investment means any investment whose yield is fixed and
determinable on the issue date.
Fixed yield bond means any bond whose yield is fixed and
determinable on the issue date using the assumptions and rules provided
in Sec. 1.148-4(b).
Fixed yield issue means any issue if each bond that is part of the
issue is a fixed yield bond.
Gross proceeds means any proceeds and replacement proceeds of an
issue.
Guaranteed investment contract includes any nonpurpose investment
that has specifically negotiated withdrawal or reinvestment provisions
and a specifically negotiated interest rate, and also includes any
agreement to supply investments on two or more future dates (e.g., a
forward supply contract).
Higher yielding investments means higher yielding investments as
defined in section 148(b)(1).
Investment means any investment property as defined in sections
148(b)(2) and 148(b)(3), and any other tax-exempt bond.
Investment proceeds means any amounts actually or constructively
received from investing proceeds of an issue.
Investment-type property is defined in paragraph (e) of this
section.
Issue price means, except as otherwise provided, issue price as
defined in sections 1273 and 1274. Generally, the issue price of bonds
that are publicly offered is the first price at which a substantial
amount of the bonds is sold to the public. Ten percent is a substantial
amount. The public does not include bond houses, brokers, or similar
persons or organizations acting in the capacity of underwriters or
wholesalers. The issue price does not change if part of the issue is
later sold at a different price. The issue price of bonds that are not
substantially identical is determined separately. The issue price of
bonds for which a bona fide public offering is made is determined as of
the sale date based on reasonable expectations regarding the initial
public offering price. If a bond is issued for property, the applicable
Federal tax-exempt rate is used in lieu of the Federal rate in
determining the issue price under section 1274. The issue price of bonds
may not exceed their fair market value as of the sale date.
Issuer generally means the entity that actually issues the issue,
and, unless the context or a provision clearly requires otherwise, each
conduit borrower of the issue. For example, rules imposed on issuers to
account for gross proceeds of an issue apply to a conduit borrower to
account for any gross proceeds received under a purpose investment.
Provisions regarding elections, filings, liability for the rebate
amount, and certifications of reasonable expectations apply only to the
actual issuer.
Multipurpose issue means an issue the proceeds of which are used for
two or more separate purposes determined in accordance with Sec. 1.148-
9(h).
Net sale proceeds means sale proceeds, less the portion of those
sale proceeds invested in a reasonably required reserve or replacement
fund under section 148(d) and as part of a minor portion under section
148(e).
Nonpurpose investment means any investment property, as defined in
section 148(b), that is not a purpose investment.
Payment means a payment as defined in Sec. 1.148-3(d) for purposes
of computing the rebate amount, and a payment as defined in Sec. 1.148-
5(b) for purposes of computing the yield on an investment.
Plain par bond means a qualified tender bond or a bond--
[[Page 660]]
(1) Issued with not more than a de minimis amount of original issue
discount or premium;
(2) Issued for a price that does not include accrued interest other
than pre-issuance accrued interest;
(3) That bears interest from the issue date at a single, stated,
fixed rate or that is a variable rate debt instrument under section
1275, in each case with interest unconditionally payable at least
annually; and
(4) That has a lowest stated redemption price that is not less than
its outstanding stated principal amount.
Plain par investment means an investment that is an obligation--
(1) Issued with not more than a de minimis amount of original issue
discount or premium, or, if acquired on a date other than the issue
date, acquired with not more than a de minimis amount of market discount
or premium;
(2) Issued for a price that does not include accrued interest other
than pre-issuance accrued interest;
(3) That bears interest from the issue date at a single, stated,
fixed rate or that is a variable rate debt instrument under section
1275, in each case with interest unconditionally payable at least
annually; and
(4) That has a lowest stated redemption price that is not less than
its outstanding stated principal amount.
Pre-issuance accrued interest means amounts representing interest
that accrued on an obligation for a period not greater than one year
before its issue date but only if those amounts are paid within one year
after the issue date.
Proceeds means any sale proceeds, investment proceeds, and
transferred proceeds of an issue. Proceeds do not include, however,
amounts actually or constructively received with respect to a purpose
investment that are properly allocable to the immaterially higher yield
under Sec. 1.148-2(d) or section 143(g) or to qualified administrative
costs recoverable under Sec. 1.148-5(e).
Program investment means a purpose investment that is part of a
governmental program in which--
(1) The program involves the origination or acquisition of purpose
investments;
(2) At least 95 percent (90 percent for qualified student loans
under section 144(b)(1)(A)) of the cost of the purpose investments
acquired under the program represents one or more loans to a substantial
number of persons representing the general public, States or political
subdivisions, 501(c)(3) organizations, persons who provide housing and
related facilities, or any combination of the foregoing;
(3) At least 95 percent of the receipts from the purpose investments
are used to pay principal, interest, or redemption prices on issues that
financed the program, to pay or reimburse administrative costs of those
issues or of the program, to pay or reimburse anticipated future losses
directly related to the program, to finance additional purpose
investments for the same general purposes of the program, or to redeem
and retire governmental obligations at the next earliest possible date
of redemption;
(4) The program documents prohibit any obligor on a purpose
investment financed by the program or any related party to that obligor
from purchasing bonds of an issue that finance the program in an amount
related to the amount of the purpose investment acquired from that
obligor; and
(5) The issuer has not waived the right to treat the investment as a
program investment.
Purpose investment means an investment that is acquired to carry out
the governmental purpose of an issue.
Qualified administrative costs means qualified administrative costs
as defined in Sec. 1.148-5(e).
Qualified guarantee means a qualified guarantee as defined in
Sec. 1.148-4(f).
Qualified hedge means a qualified hedge as defined in Sec. 1.148-
4(h)(2).
Reasonable expectations or reasonableness. An issuer's expectations
or actions are reasonable only if a prudent person in the same
circumstances as the issuer would have those same expectations or take
those same actions, based on all the objective facts and circumstances.
Factors relevant to a determination of reasonableness include the
issuer's history of conduct concerning stated expectations made in
connection with the issuance of obligations, the level of inquiry by the
issuer
[[Page 661]]
into factual matters, and the existence of covenants, enforceable by
bondholders, that require implementation of specific expectations. For a
conduit financing issue, factors relevant to a determination of
reasonableness include the reasonable expectations of the conduit
borrower, but only if, under the circumstances, it is reasonable and
prudent for the issuer to rely on those expectations.
Rebate amount means 100 percent of the amount owed to the United
States under section 148(f)(2), as further described in Sec. 1.148-3.
Receipt means a receipt as defined in Sec. 1.148-3(d) for purposes
of computing the rebate amount, and a receipt as defined in Sec. 1.148-
5(b) for purposes of computing yield on an investment.
Refunding escrow means one or more funds established as part of a
single transaction or a series of related transactions, containing
proceeds of a refunding issue and any other amounts to provide for
payment of principal or interest on one or more prior issues. For this
purpose, funds are generally not so established solely because of--
(1) The deposit of proceeds of an issue and replacement proceeds of
the prior issue in an escrow more than 6 months apart, or
(2) The deposit of proceeds of completely separate issues in an
escrow.
Replacement proceeds is defined in paragraph (c) of this section.
Restricted working capital expenditures means working capital
expenditures that are subject to the proceeds-spent-last rule in
Sec. 1.148-6(d)(3)(i) and are ineligible for any exception to that rule.
Sale proceeds means any amounts actually or constructively received
from the sale of the issue, including amounts used to pay underwriters'
discount or compensation and accrued interest other than pre-issuance
accrued interest. Sale proceeds also include, but are not limited to,
amounts derived from the sale of a right that is associated with a bond,
and that is described in Sec. 1.148-4(b)(4). See also Sec. 1.148-4(h)(5)
treating amounts received upon the termination of certain hedges as sale
proceeds.
Stated redemption price means the redemption price of an obligation
under the terms of that obligation, including any call premium.
Transferred proceeds means transferred proceeds as defined in
Sec. 1.148-9 (or the applicable corresponding provision of prior law).
Unconditionally payable means payable under terms in which--
(1) Late payment or nonpayment results in a significant penalty to
the borrower or reasonable remedies to the lender, and
(2) It is reasonably certain on the issue date that the payment will
actually be made.
Value means value determined under Sec. 1.148-4(e) for a bond, and
value determined under Sec. 1.148-5(d) for an investment.
Variable yield bond means any bond that is not a fixed yield bond.
Variable yield issue means any issue that is not a fixed yield
issue.
Yield means yield computed under Sec. 1.148-4 for an issue, and
yield computed under Sec. 1.148-5 for an investment.
Yield restricted means required to be invested at a yield that is
not materially higher than the yield on the issue under section 148(a)
and Sec. 1.148-2.
(c) Definition of replacement proceeds--(1) In general. Amounts are
replacement proceeds of an issue if the amounts have a sufficiently
direct nexus to the issue or to the governmental purpose of the issue to
conclude that the amounts would have been used for that governmental
purpose if the proceeds of the issue were not used or to be used for
that governmental purpose. For this purpose, governmental purposes
include the expected use of amounts for the payment of debt service on a
particular date. The mere availability or preliminary earmarking of
amounts for a governmental purpose, however, does not in itself
establish a sufficient nexus to cause those amounts to be replacement
proceeds. Replacement proceeds include, but are not limited to, sinking
funds, pledged funds, and other replacement proceeds described in
paragraph (c)(4) of this section, to the extent that those funds or
amounts are held by or derived from a substantial beneficiary of the
issue. A substantial beneficiary of an issue includes the issuer and any
related party to the issuer, and, if the issuer is
[[Page 662]]
not a state, the state in which the issuer is located. A person is not a
substantial beneficiary of an issue solely because it is a guarantor
under a qualified guarantee.
(2) Sinking fund. Sinking fund includes a debt service fund,
redemption fund, reserve fund, replacement fund, or any similar fund, to
the extent reasonably expected to be used directly or indirectly to pay
principal or interest on the issue.
(3) Pledged fund--(i) In general. A pledged fund is any amount that
is directly or indirectly pledged to pay principal or interest on the
issue. A pledge need not be cast in any particular form but, in
substance, must provide reasonable assurance that the amount will be
available to pay principal or interest on the issue, even if the issuer
encounters financial difficulties. A pledge to a guarantor of an issue
is an indirect pledge to secure payment of principal or interest on the
issue. A pledge of more than 50 percent of the outstanding stock of a
corporation that is a conduit borrower of the issue is not treated as a
pledge for this purpose, unless the corporation is formed or availed of
to avoid the creation of replacement proceeds.
(ii) Negative pledges. An amount is treated as pledged to pay
principal or interest on an issue if it is held under an agreement to
maintain the amount at a particular level for the direct or indirect
benefit of the bondholders or a guarantor of the bonds. An amount is not
treated as pledged under this paragraph (c)(3)(ii), however, if--
(A) The issuer or a substantial beneficiary may grant rights in the
amount that are superior to the rights of the bondholders or the
guarantor; or
(B) The amount does not exceed reasonable needs for which it is
maintained, the required level is tested no more frequently than every 6
months, and the amount may be spent without any substantial restriction
other than a requirement to replenish the amount by the next testing
date.
(4) Other replacement proceeds--(i) Bonds outstanding longer than
necessary--(A) In general. Replacement proceeds arise to the extent that
the issuer reasonably expects as of the issue date that--
(1) The term of an issue will be longer than is reasonably necessary
for the governmental purposes of the issue, and
(2) There will be available amounts during the period that the issue
remains outstanding longer than necessary. Whether an issue is
outstanding longer than necessary is determined under Sec. 1.148-10.
Replacement proceeds are created under this paragraph (c)(4)(i)(A) at
the beginning of each fiscal year during which an issue remains
outstanding longer than necessary in an amount equal to available
amounts of the issuer as of that date.
(B) Safe harbor against creation of replacement proceeds. As a safe
harbor, replacement proceeds do not arise under paragraph (c)(4)(i)(A)
of this section--
(1) For the portion of an issue that is to be used to finance
restricted working capital expenditures, if that portion is not
outstanding longer than 2 years;
(2) For the portion of an issue (including a refunding issue) that
is to be used to finance or refinance capital projects, if that portion
has a weighted average maturity that does not exceed 120 percent of the
average reasonably expected economic life of the financed capital
projects, determined in the same manner as under section 147(b); or
(3) For the portion of an issue that is a refunding issue, if that
portion has a weighted average maturity that does not exceed the
remaining weighted average maturity of the prior issue, and the issue of
which the prior issue is a part satisfies paragraph (c)(4)(i)(B) (1) or
(2) of this section.
(ii) Bonds financing a working capital reserve--(A) In general.
Except as otherwise provided in paragraph (c)(4)(ii)(B) of this section,
replacement proceeds arise to the extent a working capital reserve is,
directly or indirectly, financed with the proceeds of the issue
(regardless of the expenditure of proceeds of the issue). Thus, for
example, if an issuer that does not maintain a working capital reserve
borrows to fund a working capital reserve, the issuer will have
replacement proceeds. To determine the amount of a working capital
reserve maintained, an issuer may use the average amount maintained as a
working capital reserve
[[Page 663]]
during annual periods of at least 1 year, the last of which ends within
1 year before the issue date. For example, the amount of a working
capital reserve may be computed using the average of the beginning or
ending monthly balances of the amount maintained as a reserve (net of
unexpended gross proceeds) during the 1 year period preceding the issue
date.
(B) Exception to creation of replacement proceeds. Replacement
proceeds do not arise under paragraph (c)(4)(ii)(A) of this section with
respect to an issue--
(1) All of the net proceeds of which are spent within 6 months of
the issue date under section 148(f)(4)(B)(iii)(I); or
(2) That is not subject to the rebate requirement under the
exception provided by section 148(f)(4)(D).
(d) Elections. Except as otherwise provided, any required elections
must be made in writing, and, once made, may not be revoked without the
permission of the Commissioner.
(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. For this purpose, production of
income includes any benefit based on the time value of money, including
the benefit from making a prepayment.
(2) Non-customary prepayments. Except as otherwise provided in this
paragraph (e), a prepayment for property or services gives rise to
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 does not give
rise to 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 the
investment element of a contract that is a hedge (within the meaning of
Sec. 1.148-4(h)(2)(i)(A)) and that contains a significant investment
element because a payment by the issuer relates to a conditional or
unconditional obligation by the hedge provider to make a payment on a
later date. See Sec. 1.148-4(h)(2)(ii) relating to hedges with a
significant investment element.
[T.D. 8476, 58 FR 33517, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24041, May 10, 1994; T.D. 8718, 62 FR 25507,
May 9, 1997]