[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: 26CFR1.150-2] [Page 749-752] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 1_INCOME TAXES--Table of Contents Sec. 1.150-2 Proceeds of bonds used for reimbursement. (a) Table of contents. This table of contents contains a listing of the headings contained in Sec. 1.150-2. (a) Table of contents. (b) Scope. (c) Definitions. [[Page 750]] (d) General operating rules for reimbursement expenditures. (1) Official intent. (2) Reimbursement period. (3) Nature of expenditure. (e) Official intent rules. (1) Form of official intent. (2) Project description in official intent. (3) Reasonableness of official intent. (f) Exceptions to general operating rules. (1) De minimis exception. (2) Preliminary expenditures exception. (g) Special rules on refundings. (1) In general--once financed, not reimbursed. (2) Certain proceeds of prior issue used for reimbursement treated as unspent. (h) Anti-abuse rules. (1) General rule. (2) One-year step transaction rule. (i) Authority of the Commissioner to prescribe rules. (j) Effective date. (1) In general. (2) Transitional rules. (b) Scope. This section applies to reimbursement bonds (as defined in paragraph (c) of this section) for all purposes of sections 103 and 141 to 150. (c) Definitions. The following definitions apply: Issuer means-- (1) For any private activity bond (excluding a qualified 501(c)(3) bond, qualified student loan bond, qualified mortgage bond, or qualified veterans' mortgage bond), the entity that actually issues the reimbursement bond; and (2) For any bond not described in paragraph (1) of this definition, either the entity that actually issues the reimbursement bond or, to the extent that the reimbursement bond proceeds are to be loaned to a conduit borrower, that conduit borrower. Official intent means an issuer's declaration of intent to reimburse an original expenditure with proceeds of an obligation. Original expenditure means an expenditure for a governmental purpose that is originally paid from a source other than a reimbursement bond. Placed in service means, with respect to a facility, the date on which, based on all the facts and circumstances-- (1) The facility has reached a degree of completion which would permit its operation at substantially its design level; and (2) The facility is, in fact, in operation at such level. Reimbursement allocation means an allocation in writing that evidences an issuer's use of proceeds of a reimbursement bond to reimburse an original expenditure. An allocation made within 30 days after the issue date of a reimbursement bond may be treated as made on the issue date. Reimbursement bond means the portion of an issue allocated to reimburse an original expenditure that was paid before the issue date. (d) General operating rules for reimbursement expenditures. Except as otherwise provided, a reimbursement allocation is treated as an expenditure of proceeds of a reimbursement bond for the governmental purpose of the original expenditure on the date of the reimbursement allocation only if: (1) Official intent. Not later than 60 days after payment of the original expenditure, the issuer adopts an official intent for the original expenditure that satisfies paragraph (e) of this section. (2) Reimbursement period--(i) In general. The reimbursement allocation is made not later than 18 months after the later of-- (A) The date the original expenditure is paid; or (B) The date the project is placed in service or abandoned, but in no event more than 3 years after the original expenditure is paid. (ii) Special rule for small issuers. In applying paragraph (d)(2)(i) of this section to an issue that satisfies section 148(f)(4)(D)(i) (I) through (IV), the ``18 month'' limitation is changed to ``3 years'' and the ``3-year'' maximum reimbursement period is disregarded. (iii) Special rule for long-term construction projects. In applying paragraph (d)(2)(i) to a construction project for which both the issuer and a licensed architect or engineer certify that at least 5 years is necessary to complete construction of the project, the maximum reimbursement period is changed from ``3 years'' to ``5 years.'' (3) Nature of expenditure. The original expenditure is a capital expenditure, a cost of issuance for a bond, an expenditure described in Sec. 1.148-6(d)(3)(ii)(B) (relating to certain extraordinary [[Page 751]] working capital items), a grant (as defined in Sec. 1.148-6(d)(4)), a qualified student loan, a qualified mortgage loan, or a qualified veterans' mortgage loan. (e) Official intent rules. An official intent satisfies this paragraph (e) if: (1) Form of official intent. The official intent is made in any reasonable form, including issuer resolution, action by an appropriate representative of the issuer (e.g., a person authorized or designated to declare official intent on behalf of the issuer), or specific legislative authorization for the issuance of obligations for a particular project. (2) Project description in official intent--(i) In general. The official intent generally describes the project for which the original expenditure is paid and states the maximum principal amount of obligations expected to be issued for the project. A project includes any property, project, or program (e.g., highway capital improvement program, hospital equipment acquisition, or school building renovation). (ii) Fund accounting. A project description is sufficient if it identifies, by name and functional purpose, the fund or account from which the original expenditure is paid (e.g., parks and recreation fund--recreational facility capital improvement program). (iii) Reasonable deviations in project description. Deviations between a project described in an official intent and the actual project financed with reimbursement bonds do not invalidate the official intent to the extent that the actual project is reasonably related in function to the described project. For example, hospital equipment is a reasonable deviation from hospital building improvements. In contrast, a city office building rehabilitation is not a reasonable deviation from highway improvements. (3) Reasonableness of official intent. On the date of the declaration, the issuer must have a reasonable expectation (as defined in Sec. 1.148-1(b)) that it will reimburse the original expenditure with proceeds of an obligation. Official intents declared as a matter of course or in amounts substantially in excess of the amounts expected to be necessary for the project (e.g., blanket declarations) are not reasonable. Similarly, a pattern of failure to reimburse actual original expenditures covered by official intents (other than in extraordinary circumstances) is evidence of unreasonableness. An official intent declared pursuant to a specific legislative authorization is rebuttably presumed to satisfy this paragraph (e)(3). (f) Exceptions to general operating rules--(1) De minimis exception. Paragraphs (d)(1) and (d)(2) of this section do not apply to costs of issuance of any bond or to an amount not in excess of the lesser of $100,000 or 5 percent of the proceeds of the issue. (2) Preliminary expenditures exception. Paragraphs (d)(1) and (d)(2) of this section do not apply to any preliminary expenditures, up to an amount not in excess of 20 percent of the aggregate issue price of the issue or issues that finance or are reasonably expected by the issuer to finance the project for which the preliminary expenditures were incurred. Preliminary expenditures include architectural, engineering, surveying, soil testing, reimbursement bond issuance, and similar costs that are incurred prior to commencement of acquisition, construction, or rehabilitation of a project, other than land acquisition, site preparation, and similar costs incident to commencement of construction. (g) Special rules on refundings--(1) In general--once financed, not reimbursed. Except as provided in paragraph (g)(2) of this section, paragraph (d) of this section does not apply to an allocation to pay principal or interest on an obligation or to reimburse an original expenditure paid by another obligation. Instead, such an allocation is analyzed under rules on refunding issues. See Sec. 1.148-9. (2) Certain proceeds of prior issue used for reimbursement treated as unspent. In the case of a refunding issue (or series of refunding issues), proceeds of a prior issue purportedly used to reimburse original expenditures are treated as unspent proceeds of the prior issue unless the purported reimbursement was a valid expenditure under applicable law on reimbursement expenditures on the issue date of the prior issue. (h) Anti-abuse rules--(1) General rule. A reimbursement allocation is not an expenditure of proceeds of an issue [[Page 752]] under this section if the allocation employs an abusive arbitrage device under Sec. 1.148-10 to avoid the arbitrage restrictions or to avoid the restrictions under sections 142 through 147. (2) One-year step transaction rule--(i) Creation of replacement proceeds. A purported reimbursement allocation is invalid and thus is not an expenditure of proceeds of an issue if, within 1 year after the allocation, funds corresponding to the proceeds of a reimbursement bond for which a reimbursement allocation was made are used in a manner that results in the creation of replacement proceeds (as defined in Sec. 1.148-1) of that issue or another issue. The preceding sentence does not apply to amounts deposited in a bona fide debt service fund (as defined in Sec. 1.148-1). (ii) Example. The provisions of paragraph (h)(2)(i) of this section are illustrated by the following example. Example. On January 1, 1994, County A issues an issue of 7 percent tax-exempt bonds (the 1994 issue) and makes a purported reimbursement allocation to reimburse an original expenditure for specified capital improvements. A immediately deposits funds corresponding to the proceeds subject to the reimbursement allocation in an escrow fund to provide for payment of principal and interest on its outstanding 1991 issue of 9 percent tax-exempt bonds (the prior issue). The use of amounts corresponding to the proceeds of the reimbursement bonds to create a sinking fund for another issue within 1 year after the purported reimbursement allocation invalidates the reimbursement allocation. The proceeds retain their character as unspent proceeds of the 7 percent issue upon deposit in the escrow fund. Accordingly, the proceeds are subject to the 7 percent yield restriction of the 1994 issue instead of the 9 percent yield restriction of the prior issue. (i) Authority of the Commissioner to prescribe rules. The Commissioner may by revenue ruling or revenue procedure (see Sec. 601.601(d)(2)(ii)(b) of this chapter) prescribe rules for the expenditure of proceeds of reimbursement bonds in circumstances that do not otherwise satisfy this section. (j) Effective date--(1) In general. The provisions of this section apply to all allocations of proceeds of reimbursement bonds issued after June 30, 1993. (2) Transitional rules--(i) Official intent. An official intent is treated as satisfying the official intent requirement of paragraph (d)(1) of this section if it-- (A) Satisfied the applicable provisions of Sec. 1.103-8(a)(5) as in effect prior to July 1, 1993, (as contained in 26 CFR part 1 revised as of April 1, 1993) and was made prior to that date, or (B) Satisfied the applicable provisions of Sec. 1.103-18 as in effect between January 27, 1992, and June 30, 1993, (as contained in 26 CFR part 1 revised as of April 1, 1993) and was made during that period. (ii) Certain expenditures of private activity bonds. For any expenditure that was originally paid prior to August 15, 1993, and that would have qualified for expenditure by reimbursement from the proceeds of a private activity bond under T.D. 7199, section 1.103-8(a)(5), 1972- 2 C.B. 45 (see Sec. 601.601(d)(2)(ii)(b)) of this chapter, the requirements of that section may be applied in lieu of this section. [T.D. 8476, 58 FR 33551, June 18, 1993; 58 FR 44453, Aug. 23, 1993]