[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: 26CFR1.148-6]
[Page 689-695]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1--INCOME TAXES--Table of Contents
Sec. 1.148-6 General allocation and accounting rules.
(a) In general--(1) Reasonable accounting methods required. An
issuer may use any reasonable, consistently applied accounting method to
account for gross proceeds, investments, and expenditures of an issue.
(2) Bona fide deviations from accounting method. An accounting
method does not fail to be reasonable and consistently applied solely
because a different accounting method is used for a bona fide
governmental purpose to consistently account for a particular item. Bona
fide governmental purposes may include special State law restrictions
imposed on specific funds or actions to avoid grant forfeitures.
(3) Absence of allocation and accounting methods. If an issuer fails
to maintain books and records sufficient to establish the accounting
method for an issue and the allocation of the proceeds of that issue,
the rules of this section are applied using the specific tracing method.
This paragraph (a)(3) applies to bonds issued on or after May 16, 1997.
(b) Allocation of gross proceeds to an issue--(1) One-issue rule and
general ordering rules. Except as otherwise provided, amounts are
allocable to only one issue at a time as gross proceeds, and if amounts
simultaneously are proceeds of one issue and replacement proceeds of
another issue, those amounts are allocable to the issue of which they
are proceeds. Amounts cease to be allocated to an issue as proceeds only
when those amounts are allocated to an expenditure for a governmental
purpose, are allocated to transferred proceeds of another issue, or
cease to be allocated to that issue at retirement of the issue or under
the universal cap of paragraph (b)(2) of this section. Amounts cease to
be allocated to an issue as replacement proceeds only when those amounts
are
[[Page 690]]
allocated to an expenditure for a governmental purpose, are no longer
used in a manner that causes those amounts to be replacement proceeds of
that issue, or cease to be allocated to that issue because of the
retirement of the issue or the application of the universal cap under
paragraph (b)(2) of this section. Amounts that cease to be allocated to
an issue as gross proceeds are eligible for allocation to another issue.
Under Sec. 1.148-10(a), however, the rules in this paragraph (b)(1) do
not apply in certain cases involving abusive arbitrage devices.
(2) Universal cap on value of nonpurpose investments allocated to an
issue--(i) Application. The rules in this paragraph (b)(2) provide an
overall limitation on the amount of gross proceeds allocable to an
issue. Although the universal cap generally may be applied at any time
in the manner described in this paragraph (b)(2), it need not be applied
on any otherwise required date of application if its application on that
date would not result in a reduction or reallocation of gross proceeds
of an issue. For this purpose, if an issuer reasonably expects as of the
issue date that the universal cap will not reduce the amount of gross
proceeds allocable to the issue during the term of the issue, the
universal cap need not be applied on any date on which an issue actually
has all of the following characteristics--
(A) No replacement proceeds are allocable to the issue, other than
replacement proceeds in a bona fide debt service fund or a reasonably
required reserve or replacement fund;
(B) The net sale proceeds of the issue--
(1) Qualified for one of the temporary periods available for capital
projects, restricted working capital expenditures, or pooled financings
under Sec. 1.148-2 (e)(2), (e)(3), or (e)(4), and those net sales
proceeds were in fact allocated to expenditures prior to the expiration
of the longest applicable temporary period; or
(2) were deposited in a refunding escrow and expended as originally
expected;
(C) The issue does not refund a prior issue that, on any transfer
date, has unspent proceeds allocable to it;
(D) None of the bonds are retired prior to the date on which those
bonds are treated as retired in computing the yield on the issue; and
(E) No proceeds of the issue are invested in qualified student loans
or qualified mortgage loans.
(ii) General rule. Except as otherwise provided below, amounts that
would otherwise be gross proceeds allocable to an issue are allocated
(and remain allocated) to the issue only to the extent that the value of
the nonpurpose investments allocable to those gross proceeds does not
exceed the value of all outstanding bonds of the issue. For this
purpose, gross proceeds allocable to cash, tax-exempt bonds that would
be nonpurpose investments (absent section 148(b)(3)(A)), qualified
student loans, and qualified mortgage loans are treated as nonpurpose
investments. The values of bonds and investments are determined under
Sec. 1.148-4(e) and Sec. 1.148-5(d), respectively. The value of all
outstanding bonds of the issue is referred to as the universal cap.
Thus, for example, the universal cap for an issue of plain par bonds is
equal to the outstanding stated principal amount of those bonds plus
accrued interest.
(iii) Determination and application of the universal cap. Except as
otherwise provided, beginning with the first bond year that commences
after the second anniversary of the issue date, the amount of the
universal cap and the value of the nonpurpose investments must be
determined as of the first day of each bond year. For refunding and
refunded issues, the cap and values must be determined as of each date
that, but for this paragraph (b)(2), proceeds of the refunded issue
would become transferred proceeds of the refunding issue, and need not
otherwise be determined in the bond year in which that date occurs. All
values are determined as of the close of business on each determination
date, after giving effect to all payments on bonds and payments for and
receipts on investments on that date.
(iv) General ordering rule for allocations of amounts in excess of
the universal cap--(A) In general. If the value of all nonpurpose
investments allocated to the gross proceeds of an issue exceeds the
universal cap for that issue on a
[[Page 691]]
date as of which the cap is determined under paragraph (b)(2)(iii) of
this section, nonpurpose investments allocable to gross proceeds
necessary to eliminate that excess cease to be allocated to the issue,
in the following order of priority--
(1) First, nonpurpose investments allocable to replacement proceeds;
(2) Second, nonpurpose investments allocable to transferred
proceeds; and
(3) Third, nonpurpose investments allocable to sale proceeds and
investment proceeds.
(B) Re-allocation of certain amounts. Except as provided in
Sec. 1.148-9(b)(3), amounts that cease to be allocated to an issue as a
result of the application of the universal cap may only be allocated to
another issue as replacement proceeds.
(C) Allocations of portions of investments. Portions of investments
to which this paragraph (b)(2)(iv) applies are allocated under either
the ratable method or the representative method in the same manner as
allocations of portions of investments to transferred proceeds under
Sec. 1.148-9(c).
(v) Nonpurpose investments in a bona fide debt service fund not
counted. For purposes of this paragraph (b)(2), nonpurpose investments
allocated to gross proceeds in a bona fide debt service fund for an
issue are not taken into account in determining the value of the
nonpurpose investments, and those nonpurpose investments remain
allocated to the issue.
(c) Fair market value limit on allocations to nonpurpose
investments. Upon a purchase or sale of a nonpurpose investment, gross
proceeds of an issue are not allocated to a payment for that nonpurpose
investment in an amount greater than, or to a receipt from that
nonpurpose investment in an amount less than, the fair market value of
the nonpurpose investment as of the purchase or sale date. For purposes
of this paragraph (c) only, the fair market value of a nonpurpose
investment is adjusted to take into account qualified administrative
costs allocable to the investment.
(d) Allocation of gross proceeds to expenditures--(1) Expenditures
in general--(i) General rule. Reasonable accounting methods for
allocating funds from different sources to expenditures for the same
governmental purpose include any of the following methods if
consistently applied: a specific tracing method; a gross proceeds spent
first method; a first-in, first-out method; or a ratable allocation
method.
(ii) General limitation. An allocation of gross proceeds of an issue
to an expenditure must involve a current outlay of cash for a
governmental purpose of the issue. A current outlay of cash means an
outlay reasonably expected to occur not later than 5 banking days after
the date as of which the allocation of gross proceeds to the expenditure
is made.
(iii) Timing. An issuer must account for the allocation of proceeds
to expenditures not later than 18 months after the later of the date the
expenditure is paid or the date the project, if any, that is financed by
the issue is placed in service. This allocation must be made in any
event by the date 60 days after the fifth anniversary of the issue date
or the date 60 days after the retirement of the issue, if earlier. This
paragraph (d)(1)(iii) applies to bonds issued on or after May 16, 1997.
(2) Treatment of gross proceeds invested in purpose investments--(i)
In general. Gross proceeds of an issue invested in a purpose investment
are allocated to an expenditure on the date on which the conduit
borrower under the purpose investment allocates the gross proceeds to an
expenditure in accordance with this paragraph (d).
(ii) Exception for qualified mortgage loans and qualified student
loans. If gross proceeds of an issue are allocated to a purpose
investment that is a qualified mortgage loan or a qualified student
loan, those gross proceeds are allocated to an expenditure for the
governmental purpose of the issue on the date on which the issuer
allocates gross proceeds to that purpose investment.
(iii) Continuing allocation of gross proceeds to purpose
investments. Regardless of whether gross proceeds of a conduit financing
issue invested in a purpose investment have been allocated to an
expenditure under paragraph (d)(2) (i) or (ii) of this section, with
respect to the actual issuer those gross proceeds continue to be
allocated to the purpose
[[Page 692]]
investment until the sale, discharge, or other disposition of the
purpose investment.
(3) Expenditures for working capital purposes--(i) In general.
Except as otherwise provided in this paragraph (d)(3) or paragraph
(d)(4) of this section, proceeds of an issue may only be allocated to
working capital expenditures as of any date to the extent that those
working capital expenditures exceed available amounts (as defined in
paragraph (d)(3)(iii) of this section) as of that date (i.e., a
``proceeds-spent-last'' method). For this purpose, proceeds include
replacement proceeds described in Sec. 1.148-1(c)(4).
(ii) Exceptions--(A) General de minimis exception. Paragraph
(d)(3)(i) of this section does not apply to expenditures to pay--
(1) Any issuance costs of the issue or any qualified administrative
costs within the meaning of Secs. 1.148-5(e)(2) (i) or (ii), or
Sec. 1.148-5(e)(3)(ii)(A);
(2) Fees for qualified guarantees of the issue or payments for a
qualified hedge for the issue;
(3) Interest on the issue for a period commencing on the issue date
and ending on the date that is the later of three years from the issue
date or one year after the date on which the project is placed in
service;
(4) Amounts paid to the United States under Secs. 1.148-3, 1.148-
5(c), or 1.148-7 for the issue;
(5) Costs, other than those described in paragraphs (d)(3)(ii)(A)
(1) through (4) of this section, that do not exceed 5 percent of the
sale proceeds of an issue and that are directly related to capital
expenditures financed by the issue (e.g., initial operating expenses for
a new capital project);
(6) Principal or interest on an issue paid from unexpected excess
sale or investment proceeds; and
(7) Principal or interest on an issue paid from investment earnings
on a reserve or replacement fund that are deposited in a bona fide debt
service fund.
(B) Exception for extraordinary items. Paragraph (d)(3)(i) of this
section does not apply to expenditures for extraordinary, nonrecurring
items that are not customarily payable from current revenues, such as
casualty losses or extraordinary legal judgments in amounts in excess of
reasonable insurance coverage. If, however, an issuer or a related party
maintains a reserve for such items (e.g., a self-insurance fund) or has
set aside other available amounts for such expenses, gross proceeds
within that reserve must be allocated to expenditures only after all
other available amounts in that reserve are expended.
(C) Exception for payment of principal and interest on prior issues.
Paragraph (d)(3)(i) of this section does not apply to expenditures for
payment of principal, interest, or redemption prices on a prior issue
and, for a crossover refunding issue, interest on that issue.
(D) No exceptions if replacement proceeds created. The exceptions
provided in this paragraph (d)(3)(ii) do not apply if the allocation
merely substitutes gross proceeds for other amounts that would have been
used to make those expenditures in a manner that gives rise to
replacement proceeds. For example, if a purported reimbursement
allocation of proceeds of a reimbursement bond does not result in an
expenditure under Sec. 1.150-2, those proceeds may not be allocated to
pay interest on an issue that, absent this allocation, would have been
paid from the issuer's current revenues.
(iii) Definition of available amount--(A) In general. For purposes
of this paragraph (d)(3), available amount means any amount that is
available to an issuer for working capital expenditure purposes of the
type financed by an issue. Except as otherwise provided, available
amount excludes proceeds of the issue but includes cash, investments,
and other amounts held in accounts or otherwise by the issuer or a
related party if those amounts may be used by the issuer for working
capital expenditures of the type being financed by an issue without
legislative or judicial action and without a legislative, judicial, or
contractual requirement that those amounts be reimbursed.
(B) Reasonable working capital reserve treated as unavailable. A
reasonable working capital reserve is treated as unavailable. Any
working capital reserve is reasonable if it does not exceed 5 percent of
the actual working capital expenditures of the issuer in the fiscal
[[Page 693]]
year before the year in which the determination of available amounts is
made. For this purpose only, in determining the working capital
expenditures of an issuer for a prior fiscal year, any expenditures
(whether capital or working capital expenditures) that are paid out of
current revenues may be treated as working capital expenditures.
(C) Qualified endowment funds treated as unavailable. For a
501(c)(3) organization, a qualified endowment fund is treated as
unavailable. A fund is a qualified endowment fund if--
(1) The fund is derived from gifts or bequests, or the income
thereon, that were neither made nor reasonably expected to be used to
pay working capital expenditures;
(2) Pursuant to reasonable, established practices of the
organization, the governing body of the 501(c)(3) organization
designates and consistently operates the fund as a permanent endowment
fund or quasi-endowment fund restricted as to use; and
(3) There is an independent verification that the fund is reasonably
necessary as part of the organization's permanent capital.
(D) Application to statutory safe harbor for tax and revenue
anticipation bonds. For purposes of section 148(f)(4)(B)(iii)(II),
available amount has the same meaning as in paragraph (d)(3)(iii) of
this section, except that the otherwise-permitted reasonable working
capital reserve is treated as part of the available amount.
(4) Expenditures for grants--(i) In general. Gross proceeds of an
issue that are used to make a grant are allocated to an expenditure on
the date on which the grant is made.
(ii) Characterization of repayments of grants. If any amount of a
grant financed by gross proceeds of an issue is repaid to the grantor,
the repaid amount is treated as unspent proceeds of the issue as of the
repayment date unless expended within 60 days of repayment.
(iii) Definition of grant. Grant means a transfer for a governmental
purpose of money or property to a transferee that is not a related party
to or an agent of the transferor. The transfer must not impose any
obligation or condition to directly or indirectly repay any amount to
the transferor. Obligations or conditions intended solely to assure
expenditure of the transferred moneys in accordance with the
governmental purpose of the transfer do not prevent a transfer from
being a grant.
(5) Expenditures for reimbursement purposes. In allocating gross
proceeds of issues of reimbursement bonds (as defined in Sec. 1.150-2))
to certain expenditures, Sec. 1.150-2 applies. In allocating gross
proceeds to an expenditure to reimburse a previously paid working
capital expenditure, paragraph (d)(3) of this section applies. Thus, if
the expenditure is described in paragraph (d)(3)(ii) of this section or
there are no available amounts on the date a working capital expenditure
is made and there are no other available amounts on the date of the
reimbursement of that expenditure, gross proceeds are allocated to the
working capital expenditure as of the date of the reimbursement.
(6) Expenditures of certain commingled investment proceeds of
governmental issues. This paragraph (d)(6) applies to any issue of
governmental bonds, any issue of private activity bonds issued to
finance a facility that is required by section 142 to be owned by a
governmental unit, and any portion of an issue that is not treated as
consisting of private activity bonds under section 141(b)(9). Investment
proceeds of the issue (other than investment proceeds held in a
refunding escrow) are treated as allocated to expenditures for a
governmental purpose when the amounts are deposited in a commingled fund
with substantial tax or other revenues from governmental operations of
the issuer and the amounts are reasonably expected to be spent for
governmental purposes within 6 months from the date of the commingling.
In establishing these reasonable expectations, an issuer may use any
reasonable accounting assumption and is not bound by the proceeds-spent-
last assumption generally required for working capital expenditures
under paragraph (d)(3) of this section.
(7) Payments to related parties. Any payment of gross proceeds of
the issue to a related party of the payor is not an expenditure of those
gross proceeds.
[[Page 694]]
(e) Special rules for commingled funds--(1) In general. An
accounting method for gross proceeds of an issue in a commingled fund,
other than a bona fide debt service fund, is reasonable only if it
satisfies the requirements of paragraphs (e)(2) through (6) of this
section in addition to the other requirements of this section.
(2) Investments held by a commingled fund--(i) Required ratable
allocations. Not less frequently than as of the close of each fiscal
period, all payments and receipts (including deemed payments and
receipts) on investments held by a commingled fund must be allocated
(but not necessarily distributed) among the different investors in the
fund. This allocation must be based on a consistently applied,
reasonable ratable allocation method.
(ii) Safe harbors for ratable allocation methods. Reasonable ratable
allocation methods include, without limitation, methods that allocate
these items in proportion to either--
(A) The average daily balances of the amounts in the commingled fund
from different investors during a fiscal period (as described in
paragraph (e)(4) of this section); or
(B) The average of the beginning and ending balances of the amounts
in the commingled fund from different investors for a fiscal period that
does not exceed one month.
(iii) Definition of investor. For purposes of this paragraph (e),
the term investor means each different source of funds invested in a
commingled fund. For example, if a city invests gross proceeds of an
issue and tax revenues in a commingled fund, it is treated as two
different investors.
(3) Certain expenditures involving a commingled fund. If a ratable
allocation method is used under paragraph (d) of this section to
allocate expenditures from the commingled fund, the same ratable
allocation method must be used to allocate payments and receipts on
investments in the commingled fund under paragraph (e)(2) of this
section.
(4) Fiscal periods. The fiscal year of a commingled fund is the
calendar year unless the fund adopts another fiscal year. A commingled
fund may use any consistent fiscal period that does not exceed three
months (e.g., a daily, weekly, monthly, or quarterly fiscal period).
(5) Unrealized gains and losses on investments of a commingled fund-
-(i) Mark-to-market requirement for internal commingled funds with
longer-term investment portfolios. Except as otherwise provided in this
paragraph (e), in the case of a commingled fund in which the issuer and
any related party own more than 25 percent of the beneficial interests
in the fund (an internal commingled fund), the fund must treat all its
investments as if sold at fair market value either on the last day of
the fiscal year or the last day of each fiscal period. The net gains or
losses from these deemed sales of investments must be allocated to all
investors of the commingled fund during the period since the last
allocation.
(ii) Exception for internal commingled funds with shorter-term
investment portfolios. If the remaining weighted average maturity of all
investments held by a commingled fund during a particular fiscal year
does not exceed 18 months, and the investments held by the commingled
fund during that fiscal year consist exclusively of obligations, the
mark-to-market requirement of paragraph (e)(5)(i) of this section does
not apply.
(iii) Exception for commingled reserve funds and sinking funds. The
mark-to-market requirement of paragraph (e)(5)(i) of this section does
not apply to a commingled fund that operates exclusively as a reserve
fund, sinking fund, or replacement fund for two or more issues of the
same issuer.
(6) Allocations of commingled funds serving as common reserve funds
or sinking funds--(i) Permitted ratable allocation methods. If a
commingled fund serves as a common reserve fund, replacement fund, or
sinking fund for two or more issues (a commingled reserve), after making
reasonable adjustments to account for proceeds allocated under paragraph
(b)(1) or (b)(2) of this section, investments held by that commingled
fund must be allocated ratably among the issues served by the commingled
fund in accordance with one of the following methods--
(A) The relative values of the bonds of those issues under
Sec. 1.148-4(e);
[[Page 695]]
(B) The relative amounts of the remaining maximum annual debt
service requirements on the outstanding principal amounts of those
issues; or
(C) The relative original stated principal amounts of the
outstanding issues.
(ii) Frequency of allocations. An issuer must make any allocations
required by this paragraph (e)(6) as of a date at least every 3 years
and as of each date that an issue first becomes secured by the
commingled reserve. If relative original principal amounts are used to
allocate, allocations must also be made on the retirement of any issue
secured by the commingled reserve.
[T.D. 8476, 58 FR 33532, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24045, May 10, 1994; T.D. 8712, 62 FR 2304,
Jan. 16, 1997; T.D. 8718, 62 FR 25512, May 9, 1997]