[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: 26CFR1.149(d)-1]
[Page 717-719]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1--INCOME TAXES--Table of Contents
Sec. 1.149(d)-1 Limitations on advance refundings.
(a) General rule. Under section 149(d) and this section, nothing in
section 103(a) or in any other provision of law shall be construed to
provide an exemption from Federal income tax for interest on any bond
issued as part of an issue described in paragraphs (2), (3), or (4) of
section 149(d).
(b) Advance refunding issues that employ abusive devices--(1) In
general. An advance refunding issue employs an abusive device and is
described in section 149(d)(4) if the issue violates any of the anti-
abuse rules under Sec. 1.148-10.
(2) Failure to pay required rebate. An advance refunding issue is
described in section 149(d)(4) if the issue fails to meet the
requirements of Sec. 1.148-3. This paragraph (b)(2) applies to any
advance refunding issue issued after August 31, 1986.
(3) Mixed escrows invested in tax-exempt bonds. An advance refunding
issue is described in section 149(d)(4) if--
(i) Any of the proceeds of the issue are invested in a refunding
escrow in
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which a portion of the proceeds are invested in tax-exempt bonds and a
portion of the proceeds are invested in nonpurpose investments;
(ii) The yield on the tax-exempt bonds in the refunding escrow
exceeds the yield on the issue;
(iii) The yield on all the investments (including investment
property and tax-exempt bonds) in the refunding escrow exceeds the yield
on the issue; and
(iv) The weighted average maturity of the tax-exempt bonds in the
refunding escrow is more than 25 percent greater or less than the
weighted average maturity of the nonpurpose investments in the refunding
escrow, and the weighted average maturity of nonpurpose investments in
the refunding escrow is greater than 60 days.
(4) Tax-exempt conduit loans. For purposes of applying section
149(d) to a conduit financing issue that finances any conduit loan that
is a tax-exempt bond, the actual issuer of a conduit financing issue and
the conduit borrower of that conduit financing issue are treated as
related parties. Thus, the issue date of the conduit loan does not occur
prior to the date on which the actual issuer of the conduit financing
issue sells, exchanges, or otherwise disposes of that conduit loan, and
the use of the proceeds of the disposition to pay debt service on the
conduit financing issue causes the conduit loan to be a refunding issue.
See Sec. 1.148-10(d), Example 4.
(c) Unrefunded debt service remains eligible for future advance
refunding. For purposes of section 149(d)(3)(A)(i), any principal or
interest on a prior issue that has not been paid or provided for by any
advance refunding issue is treated as not having been advance refunded.
(d) Application of arbitrage regulations--(1) Application of
multipurpose issue rules. For purposes of sections 149(d)(2) and
(3)(A)(i), (ii), and (iii), the provisions of the multipurpose issue
rule in Sec. 1.148-9(h) apply, except that the limitation in Sec. 1.148-
9(h)(5) is disregarded.
(2) General mixed escrow rules. For purposes of section 149(d), the
provisions of Sec. 1.148-9(c) (relating to mixed escrows) apply, except
that those provisions do not apply for purposes of section 149(d)(2) and
(d)(3)(A) (i) and (ii) to amounts that were not gross proceeds of the
prior issue before the issue date of the refunding issue.
(3) Temporary periods and minor portions. Section 1.148-9(d) and (f)
contains rules applicable to temporary periods and minor portions for
advance refunding issues.
(4) Definitions. Section 1.148-1 applies for purposes of section
149(d).
(e) Taxable refundings--(1) In general. Except as provided in
paragraph (e)(2) of this section, for purposes of section
149(d)(3)(A)(i), an advance refunding issue the interest on which is not
excludable from gross income under section 103(a) (i.e., a taxable
advance refunding issue) is not taken into account. In addition, for
this purpose, an advance refunding of a taxable issue is not taken into
account unless the taxable issue is a conduit loan of a tax-exempt
conduit financing issue.
(2) Use to avoid section 149(d)(3)(A)(i). A taxable issue is taken
into account under section 149(d)(3)(A)(i) if it is issued to avoid the
limitations of that section. For example, in the case of a refunding of
a tax-exempt issue with a taxable advance refunding issue that is, in
turn, currently refunded with a tax-exempt issue, the taxable advance
refunding issue is taken into account under section 149(d)(3)(A)(i) if
the two tax-exempt issues are outstanding concurrently for more than 90
days.
(f) Redemption at first call date--(1) General rule. Under sections
149(d)(3)(A) (ii) and (iii) (the first call requirement), bonds refunded
by an advance refunding must be redeemed on their first call date if the
savings test under section 149(d)(3)(B)(i) (the savings test) is
satisfied. The savings test is satisfied if the issuer may realize
present value debt service savings (determined without regard to
administrative expenses) in connection with the issue of which the
refunding bond is a part.
(2) First call date. First call date means the earliest date on
which a bond may be redeemed (or, if issued before 1986, on the earliest
date on which that bond may be redeemed at a redemption price not in
excess of 103 percent of par). If, however, the savings test is not met
with respect to the date described in
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the preceding sentence (i.e., there are no present value savings if the
refunded bonds are retired on that date), the first call date is the
first date thereafter on which the bonds can be redeemed and on which
the savings test is met.
(3) Application of savings test to multipurpose issues. Except as
otherwise provided in this paragraph (f)(3), the multipurpose issue
rules in Sec. 1.148-9(h) apply for purposes of the savings test. If any
separate issue in a multipurpose issue increases the aggregate present
value debt service savings on the entire multipurpose issue or reduces
the present value debt service losses on that entire multipurpose issue,
that separate issue satisfies the savings test.
(g) Effective date--(1) In general. Except as provided in paragraph
(g)(2) of this section, this section applies to bonds issued after June
30, 1993, to which Secs. 1.148-1 through 1.148-11 apply, including
conduit loans that are treated as issued after June 30, 1993, under
paragraph (b)(4) of this section. In addition, this section applies to
any issue to which the election described in Sec. 1.148-11(b)(1) is
made.
(2) Special effective date for paragraph (b)(3). Paragraph (b)(3) of
this section applies to any advance refunding issue issued after May 28,
1991.
(3) Special effective date for paragraph (f)(3). Paragraph (f)(3) of
this section applies to bonds sold on or after July 8, 1997, and to any
issue to which the election described in Sec. 1.148-11(b)(1) is made.
See Sec. 1.148-11A(i) for rules relating to certain bonds sold before
July 8, 1997.
[T.D. 8476, 58 FR 33548, June 18, 1993; 58 FR 44453, Aug. 23, 1993, as
amended by T.D. 8538, 59 FR 24046, May 10, 1994; T.D. 8718, 62 FR 25513,
May 9, 1997]