IRS Revenue Procedure
2002-31

 Code Secs. 103, 148



<<FULL TEXT>>

26 CFR 1.148-10: Anti-abuse rules and Authority of Commissioner.
(Also Part I, sections 103, 148, 1.148-1, 148-2, 148-6)


REV. PROC. 2002-31

SECTION 1. PURPOSE

This final revenue procedure sets forth a safe harbor under which an
issue of tax or revenue anticipation bonds will not be treated as
outstanding longer than is reasonably necessary to accomplish the
governmental purposes of the bonds for purposes of section 1.148-10(a)(4)
of the Income Tax Regulations. On August 20, 2001, this revenue procedure
was published in proposed form as Notice 2001-49 (2001-34 I.R.B. 188).
Public comments were invited concerning the proposed revenue procedure and
none were received. This final revenue procedure is unchanged from the
proposed revenue procedure.


SECTION 2. BACKGROUND

01. Section 103(a) of the Internal Revenue Code of 1986 provides that,
except as provided in section 103(b), gross income does not include
interest on any state or local bond.

02. Section 103(b) provides that the exclusion described in section
103(a) does not apply to any arbitrage bond.

03. Section 148(a) provides that an arbitrage bond is any bond issued
as part of an issue any portion of the proceeds of which are to be used
directly or indirectly--

(1) to acquire higher yielding investments, or

(2) to replace funds which were used directly or indirectly to acquire
higher yielding investments.


04. Section 148(c)(1) provides that a bond will not be treated as an
arbitrage bond solely by reason of the fact that the proceeds of the issue
of which such bond is a part may be invested in higher yielding
investments for a reasonable temporary period until such proceeds are
needed for the purpose for which such issue was issued.

05. Section 1.148-2(e)(3)(i) of the Income Tax Regulations provides
that the proceeds of an issue that are reasonably expected to be allocated
to restricted working capital expenditures within 13 months after the
issue date qualify for a temporary period of 13 months beginning on the
issue date.
06. Section 1.148-2(e)(3)(ii) provides that if an issuer reasonably
expects to use tax revenues arising from tax levies for a single fiscal
year to re deem or retire an issue, and the issue matures by the earlier
of 2 years after the issue date or 60 days after the last date for payment
of those taxes without interest or penalty, the temporary period under
section 1.148-2(e)(3)(i) is extended until the maturity date of the issue.

07. Section 1.148-1(b) provides that restricted working capital
expenditures are working capital expenditures that are subject to the
proceeds-spent-last rule in section 1.148-6(d)(3)(i) and are ineligible
for any exception to that rule.

08. Section 1.148-10(a)(1) provides that bonds of an issue are
arbitrage bonds if an abusive arbitrage device under section
1.148-10(a)(2) is used in connection with the issue.

09. Section 1.148-10(a)(2) provides that any action is an abusive
arbitrage device if the action has the effect of (i) enabling the issuer
to exploit the difference between tax-exempt and taxable interest rates to
obtain a material financial advantage and (ii) overburdening the
tax-exempt bond market.

10. Section 1.148-10(a)(4) provides that an action overburdens the
tax-exempt bond market if it results in issuing more bonds, issuing bonds
earlier, or allowing bonds to remain outstanding longer than is otherwise
reasonably necessary to accomplish the governmental purposes of the bonds,
based on all the facts and circumstances.

11. Under section 1.148-10(a)(4), one factor evidencing that bonds may
remain outstanding longer than necessary is a term that exceeds the safe
harbors against the creation of replacement proceeds under section
1.148-1(c)(4)(i)(B). This factor may be outweighed by other factors,
however, such as long-term financial distress.

12. Section 1.148-1(c)(4)(i)(A) provides that certain replacement
proceeds arise to the extent that the issuer reasonably expects as of the
issue date that the term of the issue will be longer than is reasonably
necessary for the governmental purposes of the issue and that there will
be available amounts during the period that the issue remains outstanding
longer than necessary. Whether an issue is outstanding longer than
necessary is determined under section 1.148-10.

13. Section 1.148-1(c)(4)(i)(B)(1) provides a safe harbor against the
creation of replacement proceeds under section 1.148-1(c)(4)(i)(A) for the
portion of an issue that finances restricted working capital expenditures.
This safe harbor is met if that portion is not outstanding longer than 2
years.

14. Section 1.148-1(c)(4)(i)(B)(2) provides a safe harbor against the
creation of replacement proceeds under section 1.148-1(c)(4)(i)(A) for the
portion of an issue (including a refunding issue) that finances or
refinances capital projects. This safe harbor is met if that portion has a
weighted average maturity that does not exceed 120 percent of the average
reasonably expected economic life of the financed capital projects.

15. Section 1.148-10(d) contains examples illustrating the application
of the anti-abuse rules of section 1.148-10. Example 2(i) describes a
particular transaction in which an issue is deemed to have a longer
weighted average maturity than necessary, notwithstanding that the issue
satisfies the safe harbor against the creation of replacement proceeds in
section 1.148-1(c)(4)(i)(B)(2).


SECTION 3. SCOPE

This revenue procedure applies to an issue of tax or revenue
anticipation bonds the proceeds of which qualify for a temporary period
for restricted working capital expenditures under section 1.148-2(e)(3).


SECTION 4. SAFE HARBOR

For purposes of section 1.148-10(a)(4), an issue of tax or revenue
anticipation bonds within the scope of this revenue procedure will not be
treated as outstanding longer than is reasonably necessary to accomplish
the governmental purposes of those bonds if the final maturity date of the
issue is not later than the end of the applicable temporary period under
section 1.148-2(e)(3)(i) or section 1.148-2(e)(3)(ii) for which proceeds
of the issue qualify. This revenue procedure does not apply to determine
whether an issue of tax or revenue anticipation bonds meets the other
requirements of section 148.


SECTION 5. ADVANCE RULINGS

The Service will consider requests for rulings on proposed issues of
tax or revenue anticipation bonds that do not satisfy the safe harbor
provided in section 4.


SECTION 6. EFFECTIVE DATE

This revenue procedure applies to tax or revenue anticipation bonds
sold after May 13, 2002.


DRAFTING INFORMATION

The principal authors of this revenue procedure are Rose M. Weber and
Timothy L. Jones of the Office of the Division Counsel/Associate Chief
Counsel (Tax Exempt and Government Entities). However, other personnel
from the IRS and Treasury Department participated in the development of
this revenue procedure. For further information regarding this revenue
procedure, contact Rose M. Weber or Timothy L. Jones at (202) 622-3980
(not a toll-free call).

<<END RULING>>


 

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