[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.141-4]

[Page 639-646]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.141-4  Private security or payment test.

    (a) General rule--(1) Private security or payment. The private 
security or payment test relates to the nature of the security for, and 
the source of, the payment of debt service on an issue. The private 
payment portion of the test takes into account the payment of the debt 
service on the issue that is directly or indirectly to be derived from 
payments (whether or not to the issuer or any related party) in respect 
of property, or borrowed money, used or to be used for a private 
business use. The private security portion of the test takes into 
account the payment of the debt service on the issue that is directly or 
indirectly secured by any interest in property used or to be used for a 
private business use or payments in respect of property used or to be 
used for a private business use. For additional rules for output 
facilities, see Sec. 1.141-7.
    (2) Aggregation of private payments and security. For purposes of 
the private security or payment test, payments taken into account as 
private payments and payments or property taken into account as private 
security are aggregated. However, the same payments are not taken into 
account as both private security and private payments.
    (3) Underlying arrangement. The security for, and payment of debt 
service on, an issue is determined from both the terms of the bond 
documents and on the basis of any underlying arrangement. An underlying 
arrangement may result from separate agreements between the parties or 
may be determined on the basis of all of the facts and circumstances 
surrounding the issuance of the bonds. For example, if the payment of 
debt service on an issue is secured by both a pledge of the full faith 
and credit of a state or local governmental unit and any interest in 
property used or to be used in a private business use, the issue meets 
the private security or payment test.
    (b) Measurement of private payments and security--(1) Scope. This 
paragraph (b) contains rules that apply to both private security and 
private payments.
    (2) Present value measurement--(i) Use of present value. In 
determining whether an issue meets the private security

[[Page 640]]

or payment test, the present value of the payments or property taken 
into account is compared to the present value of the debt service to be 
paid over the term of the issue.
    (ii) Debt service--(A) Debt service paid from proceeds. Debt service 
does not include any amount paid or to be paid from sale proceeds or 
investment proceeds. For example, debt service does not include payments 
of capitalized interest funded with proceeds.
    (B) Adjustments to debt service. Debt service is adjusted to take 
into account payments and receipts that adjust the yield on an issue for 
purposes of section 148(f). For example, debt service includes fees paid 
for qualified guarantees under Sec. 1.148-4(f) and is adjusted to take 
into account payments and receipts on qualified hedges under Sec. 
1.148-4(h).
    (iii) Computation of present value--(A) In general. Present values 
are determined by using the yield on the issue as the discount rate and 
by discounting all amounts to the issue date. See, however, Sec. 1.141-
13 for special rules for refunding bonds.
    (B) Fixed yield issues. For a fixed yield issue, yield is determined 
on the issue date and is not adjusted to take into account subsequent 
events.
    (C) Variable yield issues. The yield on a variable yield issue is 
determined over the term of the issue. To determine the reasonably 
expected yield as of any date, the issuer may assume that the future 
interest rate on a variable yield bond will be the then-current interest 
rate on the bonds determined under the formula prescribed in the bond 
documents. A deliberate action requires a recomputation of the yield on 
the variable yield issue to determine the present value of payments 
under that arrangement. In that case, the issuer must use the yield 
determined as of the date of the deliberate action for purposes of 
determining the present value of payments under the arrangement causing 
the deliberate action. See paragraph (g) of this section, Example 3.
    (iv) Application to private security. For purposes of determining 
the present value of debt service that is secured by property, the 
property is valued at fair market value as of the first date on which 
the property secures bonds of the issue.
    (c) Private payments--(1) In general. This paragraph (c) contains 
rules that apply to private payments.
    (2) Payments taken into account--(i) Payments for use--(A) In 
general. Both direct and indirect payments made by any nongovernmental 
person that is treated as using proceeds of the issue are taken into 
account as private payments to the extent allocable to the proceeds used 
by that person. Payments are taken into account as private payments only 
to the extent that they are made for the period of time that proceeds 
are used for a private business use. Payments for a use of proceeds 
include payments (whether or not to the issuer) in respect of property 
financed (directly or indirectly) with those proceeds, even if not made 
by a private business user. Payments are not made in respect of financed 
property if those payments are directly allocable to other property 
being directly used by the person making the payment and those payments 
represent fair market value compensation for that other use. See 
paragraph (g) of this section, Example 4 and Example 5. See also 
paragraph (c)(3) of this section for rules relating to allocation of 
payments to the source or sources of funding of property.
    (B) Payments not to exceed use. Payments with respect to proceeds 
that are used for a private business use are not taken into account to 
the extent that the present value of those payments exceeds the present 
value of debt service on those proceeds. Payments need not be directly 
derived from a private business user, however, to be taken into account. 
Thus, if 7 percent of the proceeds of an issue is used by a person over 
the measurement period, payments with respect to the property financed 
with those proceeds are taken into account as private payments only to 
the extent that the present value of those payments does not exceed the 
present value of 7 percent of the debt service on the issue.
    (C) Payments for operating expenses. Payments by a person for a use 
of proceeds do not include the portion of any payment that is properly 
allocable to the payment of ordinary and necessary

[[Page 641]]

expenses (as defined under section 162) directly attributable to the 
operation and maintenance of the financed property used by that person. 
For this purpose, general overhead and administrative expenses are not 
directly attributable to those operations and maintenance. For example, 
if an issuer receives $5,000 rent during the year for use of space in a 
financed facility and during the year pays $500 for ordinary and 
necessary expenses properly allocable to the operation and maintenance 
of that space and $400 for general overhead and general administrative 
expenses properly allocable to that space, $500 of the $5,000 received 
would not be considered a payment for the use of the proceeds allocable 
to that space (regardless of the manner in which that $500 is actually 
used).
    (ii) Refinanced debt service. Payments of debt service on an issue 
to be made from proceeds of a refunding issue are taken into account as 
private payments in the same proportion that the present value of the 
payments taken into account as private payments for the refunding issue 
bears to the present value of the debt service to be paid on the 
refunding issue. For example, if all the debt service on a note is paid 
with proceeds of a refunding issue, the note meets the private security 
or payment test if (and to the same extent that) the refunding issue 
meets the private security or payment test. This paragraph (c)(2)(ii) 
does not apply to payments that arise from deliberate actions that occur 
more than 3 years after the retirement of the prior issue that are not 
reasonably expected on the issue date of the refunding issue. For 
purposes of this paragraph (c)(2)(ii), whether an issue is a refunding 
issue is determined without regard to Sec. 1.150-1(d)(2)(i) (relating 
to certain payments of interest).
    (3) Allocation of payments--(i) In general. Private payments for the 
use of property are allocated to the source or different sources of 
funding of property. The allocation to the source or different sources 
of funding is based on all of the facts and circumstances, including 
whether an allocation is consistent with the purposes of section 141. In 
general, a private payment for the use of property is allocated to a 
source of funding based upon the nexus between the payment and both the 
financed property and the source of funding. For this purpose, different 
sources of funding may include different tax-exempt issues, taxable 
issues, and amounts that are not derived from a borrowing, such as 
revenues of an issuer (equity).
    (ii) Payments for use of discrete property. Payments for the use of 
a discrete facility (or a discrete portion of a facility) are allocated 
to the source or different sources of funding of that discrete property.
    (iii) Allocations among two or more sources of funding. In general, 
except as provided in paragraphs (c)(3)(iv) and (v) of this section, if 
a payment is made for the use of property financed with two or more 
sources of funding (for example, equity and a tax-exempt issue), that 
payment must be allocated to those sources of funding in a manner that 
reasonably corresponds to the relative amounts of those sources of 
funding that are expended on that property. If an issuer has not 
retained records of amounts expended on the property (for example, 
records of costs of a building that was built 30 years before the 
allocation), an issuer may use reasonable estimates of those 
expenditures. For this purpose, costs of issuance and other similar 
neutral costs are allocated ratably among expenditures in the same 
manner as in Sec. 1.141-3(g)(6). A payment for the use of property may 
be allocated to two or more issues that finance property according to 
the relative amounts of debt service (both paid and accrued) on the 
issues during the annual period for which the payment is made, if that 
allocation reasonably reflects the economic substance of the 
arrangement. In general, allocations of payments according to relative 
debt service reasonably reflect the economic substance of the 
arrangement if the maturity of the bonds reasonably corresponds to the 
reasonably expected economic life of the property and debt service 
payments on the bonds are approximately level from year to year.
    (iv) Payments made under an arrangement entered into in connection 
with issuance of bonds. A private payment for the use of property made 
under an

[[Page 642]]

arrangement that is entered into in connection with the issuance of the 
issue that finances that property generally is allocated to that issue. 
Whether an arrangement is entered into in connection with the issuance 
of an issue is determined on the basis of all of the facts and 
circumstances. An arrangement is ordinarily treated as entered into in 
connection with the issuance of an issue if--
    (A) The issuer enters into the arrangement during the 3-year period 
beginning 18 months before the issue date; and
    (B) The amount of payments reflects all or a portion of debt service 
on the issue.
    (v) Allocations to equity. A private payment for the use of property 
may be allocated to equity before payments are allocated to an issue 
only if--
    (A) Not later than 60 days after the date of the expenditure of 
those amounts, the issuer adopts an official intent (in a manner 
comparable to Sec. 1.150-2(e)) indicating that the issuer reasonably 
expects to be repaid for the expenditure from a specific arrangement; 
and
    (B) The private payment is made not later than 18 months after the 
later of the date the expenditure is made or the date the project is 
placed in service.
    (d) Private security--(1) In general. This paragraph (d) contains 
rules that relate to private security.
    (2) Security taken into account. The property that is the security 
for, or the source of, the payment of debt service on an issue need not 
be property financed with proceeds. For example, unimproved land or 
investment securities used, directly or indirectly, in a private 
business use that secures an issue provides private security. Private 
security (other than financed property and private payments) for an 
issue is taken into account under section 141(b), however, only to the 
extent it is provided, directly or indirectly, by a user of proceeds of 
the issue.
    (3) Pledge of unexpended proceeds. Proceeds qualifying for an 
initial temporary period under Sec. 1.148-2(e)(2) or (3) or deposited 
in a reasonably required reserve or replacement fund (as defined in 
Sec. 1.148-2(f)(2)(i)) are not taken into account under this paragraph 
(d) before the date on which those amounts are either expended or loaned 
by the issuer to an unrelated party.
    (4) Secured by any interest in property or payments. Property used 
or to be used for a private business use and payments in respect of that 
property are treated as private security if any interest in that 
property or payments secures the payment of debt service on the bonds. 
For this purpose, the phrase any interest in is to be interpreted 
broadly and includes, for example, any right, claim, title, or legal 
share in property or payments.
    (5) Payments in respect of property. The payments taken into account 
as private security are payments in respect of property used or to be 
used for a private business use. Except as otherwise provided in this 
paragraph (d)(5) and paragraph (d)(6) of this section, the rules in 
paragraphs (c)(2)(i)(A) and (B) and (c)(2)(ii) of this section apply to 
determine the amount of payments treated as payments in respect of 
property used or to be used for a private business use. Thus, payments 
made by members of the general public for use of a facility used for a 
private business use (for example, a facility that is the subject of a 
management contract that results in private business use) are taken into 
account as private security to the extent that they are made for the 
period of time that property is used by a private business user.
    (6) Allocation of security among issues. In general, property or 
payments from the disposition of that property that are taken into 
account as private security are allocated to each issue secured by the 
property or payments on a reasonable basis that takes into account 
bondholders' rights to the payments or property upon default.
    (e) Generally applicable taxes--(1) General rule. For purposes of 
the private security or payment test, generally applicable taxes are not 
taken into account (that is, are not payments from a nongovernmental 
person and are not payments in respect of property used for a private 
business use).
    (2) Definition of generally applicable taxes. A generally applicable 
tax is an enforced contribution exacted pursuant to legislative 
authority in the exercise of the taxing power that is imposed and

[[Page 643]]

collected for the purpose of raising revenue to be used for governmental 
purposes. A generally applicable tax must have a uniform tax rate that 
is applied to all persons of the same classification in the appropriate 
jurisdiction and a generally applicable manner of determination and 
collection.
    (3) Special charges. A payment for a special privilege granted or 
service rendered is not a generally applicable tax. Special assessments 
paid by property owners benefiting from financed improvements are not 
generally applicable taxes. For example, a tax or a payment in lieu of 
tax that is limited to the property or persons benefited by an 
improvement is not a generally applicable tax.
    (4) Manner of determination and collection--(i) In general. A tax 
does not have a generally applicable manner of determination and 
collection to the extent that one or more taxpayers make any 
impermissible agreements relating to payment of those taxes. An 
impermissible agreement relating to the payment of a tax is taken into 
account whether or not it is reasonably expected to result in any 
payments that would not otherwise have been made. For example, if an 
issuer uses proceeds to make a grant to a taxpayer to improve property, 
agreements that impose reasonable conditions on the use of the grant do 
not cause a tax on that property to fail to be a generally applicable 
tax. If an agreement by a taxpayer causes the tax imposed on that 
taxpayer not to be treated as a generally applicable tax, the entire tax 
paid by that taxpayer is treated as a special charge, unless the 
agreement is limited to a specific portion of the tax.
    (ii) Impermissible agreements. The following are examples of 
agreements that cause a tax to fail to have a generally applicable 
manner of determination and collection: an agreement to be personally 
liable on a tax that does not generally impose personal liability, to 
provide additional credit support such as a third party guarantee, or to 
pay unanticipated shortfalls; an agreement regarding the minimum market 
value of property subject to property tax; and an agreement not to 
challenge or seek deferral of the tax.
    (iii) Permissible agreements. The following are examples of 
agreements that do not cause a tax to fail to have a generally 
applicable manner of determination and collection: an agreement to use a 
grant for specified purposes (whether or not that agreement is secured); 
a representation regarding the expected value of the property following 
the improvement; an agreement to insure the property and, if damaged, to 
restore the property; a right of a grantor to rescind the grant if 
property taxes are not paid; and an agreement to reduce or limit the 
amount of taxes collected to further a bona fide governmental purpose. 
For example, an agreement to abate taxes to encourage a property owner 
to rehabilitate property in a distressed area is a permissible 
agreement.
    (5) Payments in lieu of taxes. A tax equivalency payment and any 
other payment in lieu of a tax is treated as a generally applicable tax 
if--
    (i) The payment is commensurate with and not greater than the 
amounts imposed by a statute for a tax of general application; and
    (ii) The payment is designated for a public purpose and is not a 
special charge (as described in paragraph (e)(3) of this section). For 
example, a payment in lieu of taxes made in consideration for the use of 
property financed with tax-exempt bonds is treated as a special charge.
    (f) Certain waste remediation bonds--(1) Scope. This paragraph (f) 
applies to bonds issued to finance hazardous waste clean-up activities 
on privately owned land (hazardous waste remediation bonds).
    (2) Persons that are not private users. Payments from 
nongovernmental persons who are not (other than coincidentally) either 
users of the site being remediated or persons potentially responsible 
for disposing of hazardous waste on that site are not taken into account 
as private security. This paragraph (f)(2) applies to payments that 
secure (directly or indirectly) the payment of principal of, or interest 
on, the bonds under the terms of the bonds. This paragraph (f)(2) 
applies only if the payments are made pursuant to either a generally 
applicable state or local

[[Page 644]]

taxing statute or a state or local statute that regulates or restrains 
activities on an industry-wide basis of persons who are engaged in 
generating or handling hazardous waste, or in refining, producing, or 
transporting petroleum, provided that those payments do not represent, 
in substance, payment for the use of proceeds. For this purpose, a state 
or local statute that imposes payments that have substantially the same 
character as those described in Chapter 38 of the Code are treated as 
generally applicable taxes.
    (3) Persons that are private users. If payments from nongovernmental 
persons who are either users of the site being remediated or persons 
potentially responsible for disposing of hazardous waste on that site do 
not secure (directly or indirectly) the payment of principal of, or 
interest on, the bonds under the terms of the bonds, the payments are 
not taken into account as private payments. This paragraph (f)(3) 
applies only if at the time the bonds are issued the payments from those 
nongovernmental persons are not material to the security for the bonds. 
For this purpose, payments are not material to the security for the 
bonds if--
    (i) The payments are not required for the payment of debt service on 
the bonds;
    (ii) The amount and timing of the payments are not structured or 
designed to reflect the payment of debt service on the bonds;
    (iii) The receipt or the amount of the payment is uncertain (for 
example, as of the issue date, no final judgment has been entered into 
against the nongovernmental person);
    (iv) The payments from those nongovernmental persons, when and if 
received, are used either to redeem bonds of the issuer or to pay for 
costs of any hazardous waste remediation project; and
    (v) In the case when a judgment (but not a final judgment) has been 
entered by the issue date against a nongovernmental person, there are, 
as of the issue date, costs of hazardous waste remediation other than 
those financed with the bonds that may be financed with the payments.
    (g) Examples. The following examples illustrate the application of 
this section:
    Example 1. Aggregation of payments. State B issues bonds with 
proceeds of $10 million. B uses $9.7 million of the proceeds to 
construct a 10-story office building. B uses the remaining $300,000 of 
proceeds to make a loan to Corporation Y. In addition, Corporation X 
leases 1 floor of the building for the term of the bonds. Under all of 
the facts and circumstances, it is reasonable to allocate 10 percent of 
the proceeds to that 1 floor. As a percentage of the present value of 
the debt service on the bonds, the present value of Y's loan repayments 
is 3 percent and the present value of X's lease payments is 8 percent. 
The bonds meet the private security or payment test because the private 
payments taken into account are more than 10 percent of the present 
value of the debt service on the bonds.
    Example 2. Indirect private payments. J, a political subdivision of 
a state, will issue several series of bonds from time to time and will 
use the proceeds to rehabilitate urban areas. Under all of the facts and 
circumstances, the private business use test will be met with respect to 
each issue that will be used for the rehabilitation and construction of 
buildings that will be leased or sold to nongovernmental persons for use 
in their trades or businesses. Nongovernmental persons will make 
payments for these sales and leases. There is no limitation either on 
the number of issues or the aggregate amount of bonds that may be 
outstanding. No group of bondholders has any legal claim prior to any 
other bondholders or creditors with respect to specific revenues of J, 
and there is no arrangement whereby revenues from a particular project 
are paid into a trust or constructive trust, or sinking fund, or are 
otherwise segregated or restricted for the benefit of any group of 
bondholders. There is, however, an unconditional obligation by J to pay 
the principal of, and the interest on, each issue. Although not directly 
pledged under the terms of the bond documents, the leases and sales are 
underlying arrangements. The payments relating to these leases and sales 
are taken into account as private payments to determine whether each 
issue of bonds meets the private security or payment test.
    Example 3. Computation of payment in variable yield issues. (i) City 
M issues general obligation bonds with proceeds of $10 million to 
finance a 5-story office building. The bonds bear interest at a variable 
rate that is recomputed monthly according to an index that reflects 
current market yields. The yield that the interest index would produce 
on the issue date is 6 percent. M leases 1 floor of the office building 
to Corporation T, a nongovernmental person, for the term of

[[Page 645]]

the bonds. Under all of the facts and circumstances, T is treated as 
using more than 10 percent of the proceeds. Using the 6 percent yield as 
the discount rate, M reasonably expects on the issue date that the 
present value of lease payments to be made by T will be 8 percent of the 
present value of the total debt service on the bonds. After the issue 
date of the bonds, interest rates decline significantly, so that the 
yield on the bonds over their entire term is 4 percent. Using this 
actual 4 percent yield as the discount rate, the present value of lease 
payments made by T is 12 percent of the present value of the actual 
total debt service on the bonds. The bonds are not private activity 
bonds because M reasonably expected on the issue date that the bonds 
would not meet the private security or payment test and because M did 
not take any subsequent deliberate action to meet the private security 
or payment test.
    (ii) The facts are the same as Example 3(i), except that 5 years 
after the issue date M leases a second floor to Corporation S, a 
nongovernmental person, under a long-term lease. Because M has taken a 
deliberate action, the present value of the lease payments must be 
computed. On the date this lease is entered into, M reasonably expects 
that the yield on the bonds over their entire term will be 5.5 percent, 
based on actual interest rates to date and the then-current rate on the 
variable yield bonds. M uses this 5.5 percent yield as the discount 
rate. Using this 5.5 percent yield as the discount rate, as a percentage 
of the present value of the debt service on the bonds, the present value 
of the lease payments made by S is 3 percent. The bonds are private 
activity bonds because the present value of the aggregate private 
payments is greater than 10 percent of the present value of debt 
service.
    Example 4. Payments not in respect of financed property. In order to 
further public safety, City Y issues tax assessment bonds the proceeds 
of which are used to move existing electric utility lines underground. 
Although the utility lines are owned by a nongovernmental utility 
company, that company is under no obligation to move the lines. The debt 
service on the bonds will be paid using assessments levied by City Y on 
the customers of the utility. Although the utility lines are privately 
owned and the utility customers make payments to the utility company for 
the use of those lines, the assessments are payments in respect of the 
cost of relocating the utility line. Thus, the assessment payments are 
not made in respect of property used for a private business use. Any 
direct or indirect payments to Y by the utility company for the 
undergrounding are, however, taken into account as private payments.
    Example 5. Payments from users of proceeds that are not private 
business users taken into account. City P issues general obligation 
bonds to finance the renovation of a hospital that it owns. The hospital 
is operated for P by D, a nongovernmental person, under a management 
contract that results in private business use under Sec. 1.141-3. P will 
use the revenues from the hospital (after the required payments to D and 
the payment of operation and maintenance expenses) to pay the debt 
service on the bonds. The bonds meet the private security or payment 
test because the revenues from the hospital are payments in respect of 
property used for a private business use.
    Example 6. Limitation of amount of payments to amount of private 
business use not determined annually. City Q issues bonds with a term of 
15 years and uses the proceeds to construct an office building. The debt 
service on the bonds is level throughout the 15-year term. Q enters into 
a 5-year lease with Corporation R under which R is treated as a user of 
11 percent of the proceeds. R will make lease payments equal to 20 
percent of the annual debt service on the bonds for each year of the 
lease. The present value of R's lease payments is equal to 12 percent of 
the present value of the debt service over the entire 15-year term of 
the bonds. If, however, the lease payments taken into account as private 
payments were limited to 11 percent of debt service paid in each year of 
the lease, the present value of these payments would be only 8 percent 
of the debt service on the bonds over the entire term of the bonds. The 
bonds meet the private security or payment test, because R's lease 
payments are taken into account as private payments in an amount not to 
exceed 11 percent of the debt service of the bonds.
    Example 7. Allocation of payments to funds not derived from a 
borrowing. City Z purchases property for $1,250,000 using $1,000,000 of 
proceeds of its tax increment bonds and $250,000 of other revenues that 
are in its redevelopment fund. Within 60 days of the date of purchase, Z 
declared its intent to sell the property pursuant to a redevelopment 
plan and to use that amount to reimburse its redevelopment fund. The 
bonds are secured only by the incremental property taxes attributable to 
the increase in value of the property from the planned redevelopment of 
the property. Within 18 months after the issue date, Z sells the 
financed property to Developer M for $250,000, which Z uses to reimburse 
the redevelopment fund. The property that M uses is financed both with 
the proceeds of the bonds and Z's redevelopment fund. The payments by M 
are properly allocable to the costs of property financed with the 
amounts in Z's redevelopment fund. See paragraphs (c)(3) (i) and (v) of 
this section.
    Example 8. Allocation of payments to different sources of funding--
improvements. In 1997, City L issues bonds with proceeds of $8 million 
to finance the acquisition of a building. In 2002,

[[Page 646]]

L spends $2 million of its general revenues to improve the heating 
system and roof of the building. At that time, L enters into a 10-year 
lease with Corporation M for the building providing for annual payments 
of $1 million to L. The lease payments are at fair market value, and the 
lease payments do not otherwise have a significant nexus to either the 
issue or to the expenditure of general revenues. Eighty percent of each 
lease payment is allocated to the issue and is taken into account under 
the private payment test because each lease payment is properly 
allocated to the sources of funding in a manner that reasonably 
corresponds to the relative amounts of the sources of funding that are 
expended on the building.
    Example 9. Security not provided by users of proceeds not taken into 
account. County W issues certificates of participation in a lease of a 
building that W owns and covenants to appropriate annual payments for 
the lease. A portion of each payment is specified as interest. More than 
10 percent of the building is used for private business use. None of the 
proceeds of the obligations are used with respect to the building. W 
uses the proceeds of the obligations to make a grant to Corporation Y 
for the construction of a factory that Y will own. Y makes no payments 
to W, directly or indirectly, for its use of proceeds, and Y has no 
relationship to the users of the leased building. If W defaults under 
the lease, the trustee for the holders of the certificates of 
participation has a limited right of repossession under which the 
trustee may not foreclose but may lease the property to a new tenant at 
fair market value. The obligations are secured by an interest in 
property used for a private business use. However, because the property 
is not provided by a private business user and is not financed property, 
the obligations do not meet the private security or payment test.
    Example 10. Allocation of payments among issues. University L, a 
political subdivision, issued three separate series of revenue bonds 
during 1989, 1991, and 1993 under the same bond resolution. L used the 
proceeds to construct facilities exclusively for its own use. Bonds 
issued under the resolution are equally and ratably secured and payable 
solely from the income derived by L from rates, fees, and charges 
imposed by L for the use of the facilities. The bonds issued in 1989, 
1991, and 1993 are not private activity bonds. In 1997, L issues another 
series of bonds under the resolution to finance additional facilities. L 
leases 20 percent of the new facilities for the term of the 1997 bonds 
to nongovernmental persons who will use the facilities in their trades 
or businesses. The present value of the lease payments from the 
nongovernmental users will equal 15 percent of the present value of the 
debt service on the 1997 bonds. L will commingle all of the revenues 
from all its bond-financed facilities in its revenue fund. The present 
value of the portion of the lease payments from nongovernmental lessees 
of the new facilities allocable to the 1997 bonds under paragraph (d) of 
this section is less than 10 percent of the present value of the debt 
service on the 1997 bonds because the bond documents provide that the 
bonds are equally and ratably secured. Accordingly, the 1997 bonds do 
not meet the private security test. The 1997 bonds meet the private 
payment test, however, because the private lease payments for the new 
facility are properly allocated to those bonds (that is, because none of 
the proceeds of the prior issues were used for the new facilities). See 
paragraph (c) of this section.
    Example 11. Generally applicable tax. (i) Authority N issues bonds 
to finance the construction of a stadium. Under a long-term lease, 
Corporation X, a professional sports team, will use more than 10 percent 
of the stadium. X will not, however, make any payments for this private 
business use. The security for the bonds will be a ticket tax imposed on 
each person purchasing a ticket for an event at the stadium. The portion 
of the ticket tax attributable to tickets purchased by persons attending 
X's events will, on a present value basis, exceed 10 percent of the 
present value of the debt service on N's bonds. The bonds meet the 
private security or payment test. The ticket tax is not a generally 
applicable tax and, to the extent that the tax receipts relate to X's 
events, the taxes are payments in respect of property used for a private 
business use.
    (ii) The facts are the same as Example 11(i), except that the ticket 
tax is imposed by N on tickets purchased for events at a number of large 
entertainment facilities within the N's jurisdiction (for example, other 
stadiums, arenas, and concert halls), some of which were not financed 
with tax-exempt bonds. The ticket tax is a generally applicable tax and 
therefore the revenues from this tax are not payments in respect of 
property used for a private business use. The receipt of the ticket tax 
does not cause the bonds to meet the private security or payment test.

[T.D. 8712, 62 FR 2291, Jan. 16, 1997]