[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: 26CFR1.148-8]
[Page 703-705]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1--INCOME TAXES--Table of Contents
Sec. 1.148-8 Small issuer exception to rebate requirement.
(a) Scope. Under section 148(f)(4)(D), bonds issued to finance
governmental activities of certain small issuers are treated as meeting
the arbitrage rebate requirement of section 148(f)(2) (the ``small
issuer exception''). This section provides guidance on the small issuer
exception.
(b) General taxing powers. The small issuer exception generally
applies only to bonds issued by governmental units with general taxing
powers. A governmental unit has general taxing powers if it has the
power to impose taxes (or to cause another entity to impose taxes) of
general applicability which, when collected, may be used for the general
purposes of the issuer. The taxing power may be limited to a specific
type of tax, provided that the applicability of the tax is not limited
to a small number of persons. The governmental unit's exercise of its
taxing power may be subject to procedural limitations, such as voter
approval requirements, but may not be contingent on approval by another
governmental unit. See, also, section 148(f)(4)(D)(iv).
(c) Size limitation--(1) In general. An issue (other than a
refunding issue) qualifies for the small issuer exception only if the
issuer reasonably expects, as of the issue date, that the aggregate face
amount of all tax-exempt bonds (other than private activity bonds)
issued by it during that calendar year
[[Page 704]]
will not exceed $5,000,000; or the aggregate face amount of all tax-
exempt bonds of the issuer (other than private activity bonds) actually
issued during that calendar year does not exceed $5,000,000. For this
purpose, if an issue has more than a de minimis amount of original issue
discount or premium, aggregate face amount means the aggregate issue
price of that issue (determined without regard to pre-issuance accrued
interest).
(2) Aggregation rules. The following aggregation rules apply for
purposes of applying the $5,000,000 size limitation under paragraph
(c)(1) of this section.
(i) On-behalf-of issuers. An issuer and all entities (other than
political subdivisions) that issue bonds on behalf of that issuer are
treated as one issuer.
(ii) Subordinate entities--(A) In general. Except as otherwise
provided in paragraph (d) of this section and section 148(f)(4)(D)(iv),
all bonds issued by a subordinate entity are also treated as issued by
each entity to which it is subordinate. An issuer is subordinate to
another governmental entity if it is directly or indirectly controlled
by the other entity within the meaning of Sec. 1.150-1(e).
(B) Exception for allocations of size limitation. If an entity
properly makes an allocation of a portion of its $5,000,000 size
limitation to a subordinate entity (including an on behalf of issuer)
under section 148(f)(4)(D)(iv), the portion of bonds issued by the
subordinate entity under the allocation is treated as issued only by the
allocating entity and not by any other entity to which the issuing
entity is subordinate. These allocations are irrevocable and must bear a
reasonable relationship to the benefits received by the allocating unit
from issues issued by the subordinate entity. The benefits to be
considered include the manner in which--
(1) Proceeds are to be distributed;
(2) The debt service is to be paid;
(3) The facility financed is to be owned;
(4) The use or output of the facility is to be shared; and
(5) Costs of operation and maintenance are to be shared.
(iii) Avoidance of size limitation. An entity formed or availed of
to avoid the purposes of the $5,000,000 size limitation and all entities
that would benefit from the avoidance are treated as one issuer.
Situations in which an entity is formed or availed of to avoid the
purposes of the $5,000,000 size limitation include those in which the
issuer--
(A) Issues bonds which, but for the $5,000,000 size limitation,
would have been issued by another entity; and
(B) Does not receive a substantial benefit from the project financed
by the bonds.
(3) Certain refunding bonds not taken into account. In applying the
$5,000,000 size limitation, there is not taken into account the portion
of an issue that is a current refunding issue to the extent that the
stated principal amount of the refunding bond does not exceed the
portion of the outstanding stated principal amount of the refunded bond
paid with proceeds of the refunding bond. For this purpose, principal
amount means, in reference to a plain par bond, its stated principal
amount plus accrued unpaid interest, and in reference to any other bond,
its present value.
(d) Pooled financings--(1) Treatment of pool issuer. To the extent
that an issuer of a pooled financing is not an ultimate borrower in the
financing and the conduit borrowers are governmental units with general
taxing powers and not subordinate to the issuer, the pooled financing is
not counted towards the $5,000,000 size limitation of the issuer for
purposes of applying the small issuer exception to its other issues. The
issuer of the pooled financing issue is, however, subject to the rebate
requirement for any unloaned gross proceeds.
(2) Treatment of conduit borrowers. A loan to a conduit borrower in
a pooled financing qualifies for the small issuer exception, regardless
of the size of either the pooled financing or of any loan to other
conduit borrowers, only if--
(i) The bonds of the pooled financing are not private activity
bonds;
(ii) None of the loans to conduit borrowers are private activity
bonds; and
(iii) The loan to the conduit borrower meets all the requirements of
the small issuer exception.
(e) Refunding issues--(1) In general. Sections 148(f)(4)(D) (v) and
(vi) provide
[[Page 705]]
restrictions on application of the small issuer exception to refunding
issues.
(2) Multipurpose issues. The multipurpose issue allocation rules of
Sec. 1.148-9(h) apply for purposes of determining whether refunding
bonds meet the requirements of section 148(f)(4)(D)(v).
[T.D. 8476, 58 FR 33540, June 18, 1993]