[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: 26CFR1.148-5]

[Page 704-712]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.148-5  Yield and valuation of investments.

    (a) In general. This section provides rules for computing the yield 
and value of investments allocated to an issue for various purposes 
under section 148.
    (b) Yield on an investment--(1) In general. Except as otherwise 
provided, the yield on an investment allocated to an issue is computed 
under the economic accrual method, using the same compounding interval 
and financial conventions used to compute the yield on the issue. The 
yield on an investment allocated to an issue is the discount rate that, 
when used in computing the present value as of the date the investment 
is first allocated to the issue of all unconditionally payable receipts 
from the investment, produces an amount equal to the present value of 
all unconditionally payable payments for the investment. For this 
purpose, payments means amounts to be actually or constructively paid to 
acquire the investment, and receipts means amounts to be actually or 
constructively received from the investment, such as earnings and return 
of principal. The yield on a variable rate investment is determined in a 
manner comparable to the determination of the yield on a variable rate 
issue. For an issue of qualified mortgage bonds, qualified veterans' 
mortgage bonds, or qualified student loan bonds on which interest is 
paid semiannually, all regular monthly loan payments to be received 
during a semiannual debt service period may be treated as received at 
the end of that period. In addition, for any conduit financing issue, 
payments made by the conduit borrower are not treated as paid until the 
conduit borrower ceases to receive the benefit of earnings on those 
amounts.
    (2) Yield on a separate class of investments--(i) In general. For 
purposes of the yield restriction rules of section 148(a) and Sec. 
1.148-2, yield is computed

[[Page 705]]

separately for each class of investments. For this purpose, in 
determining the yield on a separate class of investments, the yield on 
each individual investment within the class is blended with the yield on 
other individual investments within the class, whether or not held 
concurrently, by treating those investments as a single investment. The 
yields on investments that are not within the same class are not 
blended.
    (ii) Separate classes of investments. Each of the following is a 
separate class of investments--
    (A) Each category of yield restricted purpose investment and program 
investment that is subject to a different definition of materially 
higher under Sec. 1.148-2(d)(2);
    (B) Yield-restricted nonpurpose investments; and
    (C) All other nonpurpose investments;
    (iii) Permissive application of single investment rules to certain 
yield restricted investments for all purposes of section 148. For all 
purposes of section 148, if an issuer reasonably expects as of the issue 
date to establish and maintain a sinking fund solely to reduce the yield 
on the investments in a refunding escrow, then the issuer may treat all 
of the yield restricted nonpurpose investments in the refunding escrow 
and that sinking fund as a single investment having a single yield, 
determined under this paragraph (b)(2). Thus, an issuer may not treat 
the nonpurpose investments in a reasonably required reserve fund and a 
refunding escrow as a single investment having a single yield under this 
paragraph (b)(2)(iii).
    (iv) Mandatory application of single investment rules for refunding 
escrows for all purposes of section 148. For all purposes of section 
148, in computing the yield on yield restricted investments allocable to 
proceeds (i.e., sale proceeds, investment proceeds, and transferred 
proceeds) of a refunding issue that are held in one or more refunding 
escrows, the individual investments are treated as a single investment 
having a single yield, whether or not held concurrently. For example, 
this single investment includes both the individual investments 
allocable to sale and investment proceeds of a refunding issue that are 
held in one refunding escrow for a prior issue and the investments 
allocable to transferred proceeds of that refunding issue that are held 
in another refunding escrow.
    (3) Investments to be held beyond issue's maturity or beyond 
temporary period. In computing the yield on investments allocable to an 
issue that are to be held beyond the reasonably expected redemption date 
of the issue, those investments are treated as sold for an amount equal 
to their value on that date. In computing the yield on investments that 
are held beyond an applicable temporary period under Sec. 1.148-2, for 
purposes of Sec. 1.148-2 those investments may be treated as purchased 
for an amount equal to their fair market value as of the end of the 
temporary period.
    (4) Consistent redemption assumptions on purpose investments. The 
yield on purpose investments allocable to an issue is computed using the 
same redemption assumptions used to compute the yield on the issue. 
Yield on purpose investments allocable to an issue of qualified mortgage 
bonds and qualified veterans' mortgage bonds must be determined in a 
manner that is consistent with, and using the assumptions required by, 
section 143(g)(2)(B).
    (5) Student loan special allowance payments included in yield. 
Except as provided in Sec. 1.148-11(e), the yield on qualified student 
loans is computed by including as receipts any special allowance 
payments made by the Secretary of Education pursuant to section 438 of 
the Higher Education Act of 1965.
    (c) Yield reduction payments to the United States--(1) In general. 
In determining the yield on an investment to which this paragraph (c) 
applies, any amount paid to the United States in accordance with this 
paragraph (c), including a rebate amount, is treated as a payment for 
that investment that reduces the yield on that investment.
    (2) Manner of payment--(i) In general. Except as otherwise provided 
in paragraph (c)(2)(ii) of this section, an amount is paid under this 
paragraph (c) if it is paid to the United States at the same time and in 
the same manner as rebate amounts are required to be paid

[[Page 706]]

or at such other time or in such manner as the Commissioner may 
prescribe. For example, yield reduction payments must be made on or 
before the date of required rebate installment payments as described in 
Sec. Sec. 1.148-3(f), (g), and (h). The provisions of Sec. 1.148-3(i) 
apply to payments made under this paragraph (c).
    (ii) Special rule for purpose investments. For purpose investments 
allocable to an issue--
    (A) No amounts are required to be paid to satisfy this paragraph (c) 
until the earlier of the end of the tenth bond year after the issue date 
of the issue or 60 days after the date on which the issue is no longer 
outstanding; and
    (B) For payments made prior to the date on which the issue is 
retired, the issuer need not pay more than 75 percent of the amount 
otherwise required to be paid as of the date to which the payment 
relates.
    (3) Applicability of special yield reduction rule--(i) Covered 
investments. This paragraph (c) applies to--
    (A) Nonpurpose investments allocable to proceeds of an issue that 
qualified for one of the temporary periods available for capital 
projects, restricted working capital expenditures, pooled financings, or 
investment proceeds under Sec. 1.148-2(e)(2), (e)(3), (e)(4), or 
(e)(6), respectively;
    (B) Investments allocable to a variable yield issue during any 
computation period in which at least 5 percent of the value of the issue 
is represented by variable yield bonds, unless the issue is an issue of 
hedge bonds (as defined in section 149(g)(3)(A));
    (C) Nonpurpose investments allocable to transferred proceeds of--
    (1) A current refunding issue to the extent necessary to reduce the 
yield on those investments to satisfy yield restrictions under section 
148(a); or
    (2) An advance refunding issue to the extent that investment of the 
refunding escrows allocable to the proceeds, other than transferred 
proceeds, of the refunding issue in zero-yielding nonpurpose investments 
is insufficient to satisfy yield restrictions under section 148(a);
    (D) Purpose investments allocable to qualified student loans under a 
program described in section 144(b)(1)(A);
    (E) Nonpurpose investments allocable to gross proceeds of an issue 
in a reasonably required reserve or replacement fund or in a fund that, 
except for its failure to satisfy the size limitation in Sec. 1.148-
2(f)(2)(ii), would qualify as a reasonably required reserve or 
replacement fund, but only to the extent that--
    (1) The value of the nonpurpose investments in the fund is not 
greater than 15 percent of the stated principal amount of the issue, as 
computed under Sec. 1.148-2(f)(2)(ii), or
    (2) The amounts in the fund (other than investment earnings) are not 
reasonably expected to be used to pay debt service on the issue other 
than in connection with reductions in the amount required to be in that 
fund (e.g. a reserve fund for a revolving fund loan program);
    (F) Nonpurpose investments allocated to replacement proceeds of a 
refunded issue as a result of the application of the universal cap to 
amounts in a refunding escrow (see Sec. 1.148-11(c)(1)(ii)); and
    (G) Investments described in Sec. 1.148-11(f).
    (ii) Exception to yield reduction payments rule for advance 
refunding issues. Paragraph (c)(1) of this section does not apply to 
investments allocable to gross proceeds of an advance refunding issue, 
other than--
    (A) Transferred proceeds to which paragraph (c)(3)(i)(C) of this 
section applies;
    (B) Replacement proceeds to which paragraph (c)(3)(i)(F) of this 
section applies; and
    (C) Transferred proceeds to which paragraph (c)(3)(i)(E) of this 
section applies, but only to the extent necessary to satisfy yield 
restriction under section 148(a) on those proceeds treating all 
investments allocable to those proceeds as a separate class.
    (d) Value of investments--(1) In general. Except as otherwise 
provided, the value of an investment (including a payment or receipt on 
the investment) on a date must be determined using one of the following 
valuation methods consistently for all purposes of section 148 to that 
investment on that date:

[[Page 707]]

    (i) Plain par investment--outstanding principal amount. A plain par 
investment may be valued at its outstanding stated principal amount, 
plus any accrued unpaid interest on that date.
    (ii) Fixed rate investment--present value. A fixed rate investment 
may be valued at its present value on that date.
    (iii) Any investment--fair market value. An investment may be valued 
at its fair market value on that date.
    (2) Mandatory valuation of yield restricted investments at present 
value. Any yield restricted investment must be valued at present value. 
For example, a purpose investment or an investment allocable to gross 
proceeds in a refunding escrow after the expiration of the initial 
temporary period must be valued at present value. See, however, 
paragraph (b)(3) of this section.
    (3) Mandatory valuation of certain investments at fair market 
value--(i) In general. Except as provided in paragraphs (d)(2), 
(d)(3)(ii), and (d)(4) of this section, an investment must be valued at 
fair market value on the date that it is first allocated to an issue or 
first ceases to be allocated to an issue as a consequence of a deemed 
acquisition or deemed disposition. For example, if an issuer deposits 
existing investments into a sinking fund for an issue, those investments 
must be valued at fair market value as of the date first deposited into 
the fund.
    (ii) Exception to fair market value requirement for transferred 
proceeds allocations, universal cap allocations, and commingled funds. 
Paragraph (d)(3)(i) of this section does not apply if the investment is 
allocated from one issue to another issue as a result of the transferred 
proceeds allocation rule under Sec. 1.148-9(b) or the universal cap 
rule under Sec. 1.148-6(b)(2), provided that both issues consist 
exclusively of tax-exempt bonds. In addition, paragraph (d)(3)(i) of 
this section does not apply to investments in a commingled fund (other 
than a bona fide debt service fund) unless it is an investment being 
initially deposited in or withdrawn from a commingled fund described in 
Sec. 1.148-6(e)(5)(iii).
    (4) Special transition rule for transferred proceeds. The value of a 
nonpurpose investment that is allocated to transferred proceeds of a 
refunding issue on a transfer date may not exceed the value of that 
investment on the transfer date used for purposes of applying the 
arbitrage restrictions to the refunded issue.
    (5) Definition of present value of an investment. Except as 
otherwise provided, present value of an investment is computed under the 
economic accrual method, using the same compounding interval and 
financial conventions used to compute the yield on the issue. The 
present value of an investment on a date is equal to the present value 
of all unconditionally payable receipts to be received from and payments 
to be paid for the investment after that date, using the yield on the 
investment as the discount rate.
    (6) Definition of fair market value--(i) In general. The fair market 
value of an investment is the price at which a willing buyer would 
purchase the investment from a willing seller in a bona fide, arm's-
length transaction. Fair market value generally is determined on the 
date on which a contract to purchase or sell the nonpurpose investment 
becomes binding (i.e., the trade date rather than the settlement date). 
Except as otherwise provided in this paragraph (d)(6), an investment 
that is not of a type traded on an established securities market, within 
the meaning of section 1273, is rebuttably presumed to be acquired or 
disposed of for a price that is not equal to its fair market value. The 
fair market value of a United States Treasury obligation that is 
purchased directly from the United States Treasury is its purchase 
price.
    (ii) Safe harbor for establishing fair market value for certificates 
of deposit. This paragraph (d)(6)(ii) applies to a certificate of 
deposit that has a fixed interest rate, a fixed payment schedule, and a 
substantial penalty for early withdrawal. The purchase price of such a 
certificate of deposit is treated as its fair market value on the 
purchase date if the yield on the certificate of deposit is not less 
than--
    (A) The yield on reasonably comparable direct obligations of the 
United States; and
    (B) The highest yield that is published or posted by the provider to 
be currently available from the provider

[[Page 708]]

on reasonably comparable certificates of deposit offered to the public.
    (iii) Safe harbor for establishing fair market value for guaranteed 
investment contracts and investments purchased for a yield restricted 
defeasance escrow. The purchase price of a guaranteed investment 
contract and the purchase price of an investment purchased for a yield 
restricted defeasance escrow will be treated as the fair market value of 
the investment on the purchase date if all of the following requirements 
are satisfied:
    (A) The issuer makes a bona fide solicitation for the purchase of 
the investment. A bona fide solicitation is a solicitation that 
satisfies all of the following requirements:
    (1) The bid specifications are in writing and are timely forwarded 
to potential providers.
    (2) The bid specifications include all material terms of the bid. A 
term is material if it may directly or indirectly affect the yield or 
the cost of the investment.
    (3) The bid specifications include a statement notifying potential 
providers that submission of a bid is a representation that the 
potential provider did not consult with any other potential provider 
about its bid, that the bid was determined without regard to any other 
formal or informal agreement that the potential provider has with the 
issuer or any other person (whether or not in connection with the bond 
issue), and that the bid is not being submitted solely as a courtesy to 
the issuer or any other person for purposes of satisfying the 
requirements of paragraph (d)(6)(iii)(B)(1) or (2) of this section.
    (4) The terms of the bid specifications are commercially reasonable. 
A term is commercially reasonable if there is a legitimate business 
purpose for the term other than to increase the purchase price or reduce 
the yield of the investment. For example, for solicitations of 
investments for a yield restricted defeasance escrow, the hold firm 
period must be no longer than the issuer reasonably requires.
    (5) For purchases of guaranteed investment contracts only, the terms 
of the solicitation take into account the issuer's reasonably expected 
deposit and drawdown schedule for the amounts to be invested.
    (6) All potential providers have an equal opportunity to bid. For 
example, no potential provider is given the opportunity to review other 
bids (i.e., a last look) before providing a bid.
    (7) At least three reasonably competitive providers are solicited 
for bids. A reasonably competitive provider is a provider that has an 
established industry reputation as a competitive provider of the type of 
investments being purchased.
    (B) The bids received by the issuer meet all of the following 
requirements:
    (1) The issuer receives at least three bids from providers that the 
issuer solicited under a bona fide solicitation meeting the requirements 
of paragraph (d)(6)(iii)(A) of this section and that do not have a 
material financial interest in the issue. A lead underwriter in a 
negotiated underwriting transaction is deemed to have a material 
financial interest in the issue until 15 days after the issue date of 
the issue. In addition, any entity acting as a financial advisor with 
respect to the purchase of the investment at the time the bid 
specifications are forwarded to potential providers has a material 
financial interest in the issue. A provider that is a related party to a 
provider that has a material financial interest in the issue is deemed 
to have a material financial interest in the issue.
    (2) At least one of the three bids described in paragraph 
(d)(6)(iii)(B)(1) of this section is from a reasonably competitive 
provider, within the meaning of paragraph (d)(6)(iii)(A)(7) of this 
section.
    (3) If the issuer uses an agent to conduct the bidding process, the 
agent did not bid to provide the investment.
    (C) The winning bid meets the following requirements:
    (1) Guaranteed investment contracts. If the investment is a 
guaranteed investment contract, the winning bid is the highest yielding 
bona fide bid (determined net of any broker's fees).
    (2) Other investments. If the investment is not a guaranteed 
investment contract, the following requirements are met:
    (i) The winning bid is the lowest cost bona fide bid (including any 
broker's

[[Page 709]]

fees). The lowest cost bid is either the lowest cost bid for the 
portfolio or, if the issuer compares the bids on an investment-by-
investment basis, the aggregate cost of a portfolio comprised of the 
lowest cost bid for each investment. Any payment received by the issuer 
from a provider at the time a guaranteed investment contract is 
purchased (e.g., an escrow float contract) for a yield restricted 
defeasance escrow under a bidding procedure meeting the requirements of 
this paragraph (d)(6)(iii) is taken into account in determining the 
lowest cost bid.
    (ii) The lowest cost bona fide bid (including any broker's fees) is 
not greater than the cost of the most efficient portfolio comprised 
exclusively of State and Local Government Series Securities from the 
United States Department of the Treasury, Bureau of Public Debt. The 
cost of the most efficient portfolio of State and Local Government 
Series Securities is to be determined at the time that bids are required 
to be submitted pursuant to the terms of the bid specifications.
    (iii) If State and Local Government Series Securities from the 
United States Department of the Treasury, Bureau of Public Debt are not 
available for purchase on the day that bids are required to be submitted 
pursuant to terms of the bid specifications because sales of those 
securities have been suspended, the cost comparison of paragraph 
(d)(6)(iii) (C)(2)(ii) of this section is not required.
    (D) The provider of the investments or the obligor on the guaranteed 
investment contract certifies the administrative costs that it pays (or 
expects to pay, if any) to third parties in connection with supplying 
the investment.
    (E) The issuer retains the following records with the bond documents 
until three years after the last outstanding bond is redeemed:
    (1) For purchases of guaranteed investment contracts, a copy of the 
contract, and for purchases of investments other than guaranteed 
investment contracts, the purchase agreement or confirmation.
    (2) The receipt or other record of the amount actually paid by the 
issuer for the investments, including a record of any administrative 
costs paid by the issuer, and the certification under paragraph 
(d)(6)(iii)(D) of this section.
    (3) For each bid that is submitted, the name of the person and 
entity submitting the bid, the time and date of the bid, and the bid 
results.
    (4) The bid solicitation form and, if the terms of the purchase 
agreement or the guaranteed investment contract deviated from the bid 
solicitation form or a submitted bid is modified, a brief statement 
explaining the deviation and stating the purpose for the deviation. For 
example, if the issuer purchases a portfolio of investments for a yield 
restricted defeasance escrow and, in order to satisfy the yield 
restriction requirements of section 148, an investment in the winning 
bid is replaced with an investment with a lower yield, the issuer must 
retain a record of the substitution and how the price of the substitute 
investment was determined. If the issuer replaces an investment in the 
winning bid portfolio with another investment, the purchase price of the 
new investment is not covered by the safe harbor unless the investment 
is bid under a bidding procedure meeting the requirements of this 
paragraph (d)(6)(iii).
    (5) For purchases of investments other than guaranteed investment 
contracts, the cost of the most efficient portfolio of State and Local 
Government Series Securities, determined at the time that the bids were 
required to be submitted pursuant to the terms of the bid 
specifications.
    (e) Administrative costs of investments--(1) In general. Except as 
otherwise provided in this paragraph (e), an allocation of gross 
proceeds of an issue to a payment or a receipt on an investment is not 
adjusted to take into account any costs or expenses paid, directly or 
indirectly, to purchase, carry, sell, or retire the investment 
(administrative costs). Thus, these administrative costs generally do 
not increase the payments for, or reduce the receipts from, investments.
    (2) Qualified administrative costs on nonpurpose investments--(i) In 
general. In determining payments and receipts on nonpurpose investments, 
qualified administrative costs are taken into account. Thus, qualified 
administrative

[[Page 710]]

costs increase the payments for, or decrease the receipts from, the 
investments. Qualified administrative costs are reasonable, direct 
administrative costs, other than carrying costs, such as separately 
stated brokerage or selling commissions, but not legal and accounting 
fees, recordkeeping, custody, and similar costs. General overhead costs 
and similar indirect costs of the issuer such as employee salaries and 
office expenses and costs associated with computing the rebate amount 
under section 148(f) are not qualified administrative costs. In general, 
administrative costs are not reasonable unless they are comparable to 
administrative costs that would be charged for the same investment or a 
reasonably comparable investment if acquired with a source of funds 
other than gross proceeds of tax-exempt bonds.
    (ii) Special rule for administrative costs of nonpurpose investments 
in certain regulated investment companies and commingled funds. 
Qualified administrative costs include all reasonable administrative 
costs, without regard to the limitation on indirect costs under 
paragraph (e)(2)(i) of this section, incurred by:
    (A) Regulated investment companies. A publicly offered regulated 
investment company (as defined in section 67(c)(2)(B)); and
    (B) External commingled funds. A widely held commingled fund in 
which no investor in the fund owns more than 10 percent of the 
beneficial interest in the fund. For purposes of this paragraph 
(e)(2)(ii)(B), a fund is treated as widely held only if, during the 
immediately preceding fixed, semiannual period chosen by the fund (e.g., 
semiannual periods ending June 30 and December 31), the fund had a daily 
average of more than 15 investors that were not related parties, and the 
daily average amount each investor had invested in the fund was not less 
than the lesser of $500,000 and 1 percent of the daily average of the 
total amount invested in the fund. For purposes of this paragraph 
(e)(2)(ii)(B), an investor will be treated as owning not more than 10 
percent of the beneficial interest in the fund if, on the date of each 
deposit by the investor into the fund, the total amount the investor and 
any related parties have on deposit in the fund is not more than 10 
percent of the total amount that all investors have on deposit in the 
fund. For purposes of the preceding sentence, the total amount that all 
investors have on deposit in the fund is equal to the sum of all 
deposits made by the investor and any related parties on the date of 
those deposits and the closing balance in the fund on the day before 
those deposits. If any investor in the fund owns more than 10 percent of 
the beneficial interest in the fund, the fund does not qualify under 
this paragraph (e)(2)(ii)(B) until that investor makes sufficient 
withdrawals from the fund to reduce its beneficial interest in the fund 
to 10 percent or less.
    (iii) Special rule for guaranteed investment contracts and 
investments purchased for a yield restricted defeasance escrow--(A) In 
general. An amount paid for a broker's commission or similar fee with 
respect to a guaranteed investment contract or investments purchased for 
a yield restricted defeasance escrow is a qualified administrative cost 
if the fee is reasonable within the meaning of paragraph (e)(2)(i) of 
this section.
    (B) Safe harbor--(1) In general. A broker's commission or similar 
fee with respect to the acquisition of a guaranteed investment contract 
or investments purchased for a yield restricted defeasance escrow is 
reasonable within the meaning of paragraph (e)(2)(i) of this section to 
the extent that--
    (i) The amount of the fee that the issuer treats as a qualified 
administrative cost does not exceed the lesser of:
    (A) $30,000 and
    (B) 0.2% of the computational base or, if more, $3,000; and
    (ii) For any issue, the issuer does not treat as qualified 
administrative costs more than $85,000 in brokers' commissions or 
similar fees with respect to all guaranteed investment contracts and 
investments for yield restricted defeasance escrows purchased with gross 
proceeds of the issue.
    (2) Computational base. For purposes of paragraph (e)(2)(iii)(B)(1) 
of this section, computational base shall mean--
    (i) For a guaranteed investment contract, the amount of gross 
proceeds the issuer reasonably expects, as of the

[[Page 711]]

date the contract is acquired, to be deposited in the guaranteed 
investment contract over the term of the contract, and
    (ii) For investments (other than guaranteed investment contracts) to 
be deposited in a yield restricted defeasance escrow, the amount of 
gross proceeds initially invested in those investments.
    (3) Cost-of-living adjustment. In the case of a calendar year after 
2004, each of the dollar amounts in paragraph (e)(2)(iii)(B)(1) of this 
section shall be increased by an amount equal to--
    (i) Such dollar amount; multiplied by
    (ii) The cost-of-living adjustment determined under section 1(f)(3) 
for such calendar year by using the language ``calendar year 2003'' 
instead of ``calendar year 1992'' in section 1(f)(3)(B).
    (4) Rounding. If any increase determined under paragraph 
(e)(2)(iii)(B)(3) of this section is not a multiple of $1,000, such 
increase shall be rounded to the nearest multiple thereof.
    (5) Applicable year for cost-of-living adjustment. The cost-of-
living adjustments under paragraph (e)(2)(iii)(B)(3) of this section 
shall apply to the safe harbor amounts under paragraph (e)(2)(iii)(B)(1) 
of this section based on the year the guaranteed investment contract or 
the investments for the yield restricted defeasance escrow, as 
applicable, are acquired.
    (6) Cost-of-living adjustment to determine remaining amount of per-
issue safe harbor--(i) In general. This paragraph (e)(2)(iii)(B)(6) 
applies to determine the portion of the safe harbor amount under 
paragraph (e)(2)(iii)(B)(1)(ii) of this section, as modified by 
paragraph (e)(2)(iii)(B)(3) of this section (the per-issue safe harbor), 
that is available (the remaining amount) for any year (the determination 
year) if the per-issue safe harbor was partially used in one or more 
prior years.
    (ii) Remaining amount of per-issue safe harbor. The remaining amount 
of the per-issue safe harbor for any determination year is equal to the 
per-issue safe harbor for that year, reduced by the portion of the per-
issue safe harbor used in one or more prior years.
    (iii) Portion of per-issue safe harbor used in prior years. The 
portion of the per-issue safe harbor used in any prior year (the prior 
year) is equal to the total amount of broker's commissions or similar 
fees paid in connection with guaranteed investment contracts or 
investments for a yield restricted defeasance escrow acquired in the 
prior year that the issuer treated as qualified administrative costs for 
the issue, multiplied by a fraction the numerator of which is the per-
issue safe harbor for the determination year and the denominator of 
which is the per-issue safe harbor for the prior year. See paragraph 
(e)(2)(iii)(C) Example 2 of this section.
    (C) Examples. The following examples illustrate the application of 
the safe harbor in paragraph (e)(2)(iii)(B) of this section:

    Example 1. Multipurpose issue. In 2003, the issuer of a multipurpose 
issue uses brokers to acquire the following investments with gross 
proceeds of the issue: a guaranteed investment contract for amounts to 
be deposited in a construction fund (construction GIC), Treasury 
securities to be deposited in a yield restricted defeasance escrow 
(Treasury investments) and a guaranteed investment contract that will be 
used to earn a return on what otherwise would be idle cash balances from 
maturing investments in the yield restricted defeasance escrow (the 
float GIC). The issuer deposits $22,000,000 into the construction GIC 
and reasonably expects that no further deposits will be made over its 
term. The issuer uses $8,040,000 of the proceeds to purchase the 
Treasury investments. The issuer reasonably expects that it will make 
aggregate deposits of $600,000 to the float GIC over its term. The 
brokers' fees are $30,000 for the construction GIC, $16,080 for the 
Treasury investments and $3,000 for the float GIC. The issuer has not 
previously treated any brokers' commissions or similar fees as qualified 
administrative costs. The issuer may claim all $49,080 in brokers' fees 
for these investments as qualified administrative costs because the fees 
do not exceed the safe harbors in paragraph (e)(2)(iii)(B) of this 
section. Specifically, each of the brokers' fees equals the lesser of 
$30,000 and 0.2% of the computational base (or, if more, $3,000) (i.e., 
lesser of $30,000 and 0.2% x $22,000,000 for the construction GIC; 
lesser of $30,000 and 0.2% x $8,040,000 for the Treasury investments; 
and lesser of $30,000 and $3,000 for the float GIC). In addition, the 
total amount of brokers' fees claimed by the issuer as qualified 
administrative costs ($49,080) does not exceed the per-issue safe harbor 
of $85,000.
    Example 2. Cost-of-living adjustment. In 2003, an issuer issues 
bonds and uses gross proceeds of the issue to acquire two guaranteed 
investment contracts. The issuer pays a total of $50,000 in brokers' 
fees for the two

[[Page 712]]

guaranteed investment contracts and treats these fees as qualified 
administrative costs. In a year subsequent to 2003 (Year Y), the issuer 
uses gross proceeds of the issue to acquire two additional guaranteed 
investment contracts, paying a total of $20,000 in broker's fees for the 
two guaranteed investment contracts, and treats those fees as qualified 
administrative costs. For Year Y, applying the cost-of-living adjustment 
under paragraph (e)(2)(iii)(B)(3) of this section, the safe harbor 
dollar limits under paragraph (e)(2)(iii)(B)(1) of this section are 
$3,000, $32,000 and $90,000. The remaining amount of the per-issue safe 
harbor for Year Y is $37,059 ($90,000-[$50,000 x $90,000/$85,000]). The 
broker's fees in Year Y do not exceed the per-issue safe harbor under 
paragraph (e)(2)(iii)(B)(1)(ii) (as modified by paragraph 
(e)(2)(iii)(B)(3)) of this section because the broker's fees do not 
exceed the remaining amount of the per-issue safe harbor determined 
under paragraph (e)(2)(iii)(B)(6) of this section for Year Y. In a year 
subsequent to Year Y (Year Z), the issuer uses gross proceeds of the 
issue to acquire an additional guaranteed investment contract, pays a 
broker's fee of $15,000 for the guaranteed investment contract, and 
treats the broker's fee as a qualified administrative cost. For Year Z, 
applying the cost-of-living adjustment under paragraph (e)(2)(iii)(B)(3) 
of this section, the safe harbor dollar limits under paragraph 
(e)(2)(iii)(B)(1) of this section are $3,000, $33,000 and $93,000. The 
remaining amount of the per-issue safe harbor for Year Z is $17,627 
($93,000--[($50,000 x $93,000/$85,000) + ($20,000 x $93,000/$90,000)]). 
The broker's fee incurred in Year Z does not exceed the per-issue safe 
harbor under paragraph (e)(2)(iii)(B)(1)(ii) (as modified by paragraph 
(e)(2)(iii)(B)(3)) of this section because the broker's fee does not 
exceed the remaining amount of the per-issue safe harbor determined 
under paragraph (e)(2)(iii)(B)(6) of this section for Year Z. See 
paragraph (e)(2)(iii)(B)(6) of this section.
    (3) Qualified administrative costs on purpose investments--(i) In 
general. In determining payments and receipts on purpose investments, 
qualified administrative costs described in this paragraph (e)(3) paid 
by the conduit borrower are taken into account. Thus, these costs 
increase the payments for, or decrease the receipts from, the purpose 
investments. This rule applies even if those payments merely reimburse 
the issuer. Although the actual payments by the conduit borrower may be 
made at any time, for this purpose, a pro rata portion of each payment 
made by a conduit borrower is treated as a reimbursement of reasonable 
administrative costs, if the present value of those payments does not 
exceed the present value of the reasonable administrative costs paid by 
the issuer, using the yield on the issue as the discount rate.
    (ii) Definition of qualified administrative costs of purpose 
investments--(A) In general. Except as otherwise provided in this 
paragraph (e)(3)(ii), qualified administrative costs of a purpose 
investment means--
    (1) Costs or expenses paid, directly or indirectly, to purchase, 
carry, sell, or retire the investment; and
    (2) Costs of issuing, carrying, or repaying the issue, and any 
underwriters' discount.
    (B) Limitation on program investments. For a program investment, 
qualified administrative costs include only those costs described in 
paragraph (e)(3)(ii)(A)(2) of this section.

[T.D. 8476, 58 FR 33529, June 18, 1993; 58 FR 44452, Aug. 23, 1993, as 
amended by T.D. 8538, 59 FR 24044, May 10, 1994; T.D. 8718, 62 FR 25511, 
May 9, 1997; T.D. 8801, 63 FR 71751, Dec. 30, 1998; T.D. 9097, 68 FR 
69022, Dec. 11, 2003]