[Federal Register Volume 75, Number 146 (Friday, July 30, 2010)]
[Rules and Regulations]
[Pages 44901-44907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-18678]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9495]
RIN 1545-BC61
Qualified Zone Academy Bonds; Obligations of States and Political
Subdivisions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document removes the temporary regulations and provides
final regulations that provide guidance to state and local governments
that issue qualified zone academy bonds and to banks, insurance
companies, and other taxpayers that hold those bonds on the program
requirements for qualified zone academy bonds. The final regulations
implement the amendments to section 1397E (discussed in this preamble)
and provide guidance on the maximum term, permissible use of proceeds,
and remedial actions for qualified zone academy bonds.
DATES: Effective Date: These regulations are effective on July 30,
2010.
Applicability Date: For dates of applicability, see Sec. 1.1397E-
1(m) of these regulations.
FOR FURTHER INFORMATION CONTACT: Zoran Stojanovic, (202) 622-3980 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has
[[Page 44902]]
been reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))
under control number 1545-1908. This information will be used to
identify issuers of qualified zone academy bonds that have established
a defeasance escrow as a remedial action taken because of failure to
satisfy certain requirements of section 1397E.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number.
Books and records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
Section 1397E(a) of the Internal Revenue Code (Code) provides that
an eligible taxpayer (within the meaning of section 1397E(d)(6)) that
holds a qualified zone academy bond (``QZAB'' or ``QZABs'') on a credit
allowance date is allowed a credit against Federal income tax for the
taxable year that includes the credit allowance date. In general, a
QZAB is a bond issued by a state or local government to finance certain
eligible public school purposes under section 1397E(d). Section
1397E(b) provides that the amount of the QZAB credit equals the product
of the credit rate and the face amount of the bond held by the taxpayer
on the credit allowance date. Under section 1397E(b)(2), the credit
rate is determined by the Treasury Department and equals the percentage
that the Department estimates generally will permit the issuance of
QZABs without discount and without interest cost to the issuer. Section
1397E(i)(1) defines credit allowance date as the last day of the one-
year period beginning on the issue date of the issue and the last day
of each successive one-year period thereafter. Under section
1397E(d)(3), the maximum term of a QZAB is determined by the Treasury
Department and equals the term that the Department estimates will
result in the present value of the obligation to repay the principal on
the bond being equal to 50 percent of the face amount of the bond.
Section 1397E(j) provides that the amount of the QZAB credit
allowed to the taxpayer is included in the taxpayer's gross income.
Section 1397E(e) imposes a national limitation on the amount of
QZABs that may be issued for each calendar year. The limitation is
allocated by the Treasury Department among the States on the basis of
their respective populations of individuals below the poverty line.
Section 1397E was amended by section 107 of the Tax Relief and
Health Care Act of 2006, Public Law 109-432, 120 Stat. 2922 (2006) (the
``2006 Act''), by adding certain requirements for a bond to be a QZAB.
In general, the 2006 Act added a new five-year spending period
requirement, arbitrage investment restrictions, and information
reporting requirements. Specifically, the 2006 Act added new section
1397E(f), which generally imposes spending period restrictions under
which an issuer of QZABs must reasonably expect, as of the issue date,
that: (1) At least 95 percent of the proceeds from the sale of the
issue are to be spent for one or more qualified purposes with respect
to qualified zone academies within the 5-year period beginning on the
issue date of the QZAB; (2) a binding commitment with a third party to
spend at least 10 percent of the proceeds from the sale of the issue
will be incurred within the six-month period beginning on the issue
date of the QZAB; and (3) such purposes will be completed with due
diligence and the proceeds from the sale of the issue will be spent
with due diligence. New section 1397E(f)(2) added by the 2006 Act
provides authority to the Secretary of the Treasury to extend the five-
year spending period. To the extent that less than 95 percent of the
proceeds of the issue are spent within the five-year spending period
(plus any extension granted by the Secretary of the Treasury), the 2006
Act requires the issuer to redeem the nonqualified bonds within 90 days
after the end of such period.
In addition, the 2006 Act added new section 1397E(g), which
generally requires that an issue of QZABs satisfy the arbitrage
investment restrictions of section 148 with respect to the proceeds of
the issue.
Finally, the 2006 Act added new section 1397E(h), which generally
requires that issuers of QZABs submit information reporting returns to
the IRS similar to the information reporting returns required to be
submitted to the IRS under section 149(e) for tax-exempt state or local
bonds.
Section 15316 of the Food, Conservation, and Energy Act of 2008,
Public Law 110-246, 122 Stat. 1651 (2008) (the ``2008 Energy Act''),
added section 54A to the Code. Section 54A(a) provides that a taxpayer
that holds a qualified tax credit bond on one or more credit allowance
dates of the bond occurring during any taxable year is allowed as a
credit against Federal income tax for the taxable year an amount equal
to the sum of the credits determined under section 54A(b) with respect
to such dates. Section 54A(d)(1) provides that the term qualified tax
credit bond (``QTCB'') means a certain bond which is part of an issue
that meets the requirements of section 54A(d)(2), (3), (4), (5), and
(6) regarding expenditures of bond proceeds, information reporting,
arbitrage, maturity limitations, and prohibitions against financial
conflicts of interest. At the time of its enactment, the 2008 Energy
Act did not treat QZABs as QTCBs.
Section 313 of the Tax Extenders and Alternative Minimum Tax Relief
Act of 2008, Div. C of Public Law 110-343, 122 Stat. 3765 (2008) (the
``2008 Act'') added new section 1397E(m) providing that section 1397E
shall not apply to any obligation issued after the date of the
enactment of the 2008 Act on October 3, 2008. Effective for obligations
issued after October 3, 2008, the 2008 Act amended section 54A(d)(1)
defining a QTCB to include a qualified zone academy bond under section
54E of the Code. The 2008 Act also added section 54E, which provides
revised program provisions for QZABs in lieu of the existing provisions
under section 1397E and amended section 54A(d)(2)(C) to provide that,
for purposes of section 54A(d)(2), the term ``qualified purpose'' for a
QZAB means a purpose specified in section 54E(a)(1).
Section 301 of the Hiring Incentives to Restore Employment Act,
Public Law 111-147, 124 Stat. 71 (2010) (the ``HIRE Act'') added
subsection (f) to section 6431 of the Code, which authorizes issuers to
elect irrevocably to receive Federal direct payments of allowances of
refundable tax credits to subsidize a prescribed portion of their
borrowing costs instead of the Federal tax credits that otherwise would
be allowed to holders of certain qualified tax credit bonds under
section 54A. Under section 6431(f)(3)(A)(iii), the direct payment
subsidy option under section 6431(f) applies to qualified zone academy
bonds issued under section 54E that meet the requirements to be
qualified tax credit bonds under section 54A.
Temporary regulations (TD 8755) interpreting section 1397E were
published on January 7, 1998 (63 FR 671), and amended on July 1, 1999
(TD 8826; 64 FR 35573). Final regulations under section 1397E (TD 8903)
were published on September 26, 2000 (65 FR 57732) (the ``First Final
Regulations''). On March 26, 2004, a notice of proposed
[[Page 44903]]
rulemaking (REG-121475-03) was published in the Federal Register (69 FR
15747) (the ``2004 Proposed Regulations''). The 2004 Proposed
Regulations proposed to amend the First Final Regulations by providing
guidance on the maximum term, permissible use of proceeds, and remedial
actions for QZABs. A public hearing was scheduled for July 21, 2004.
The public hearing was cancelled because no requests to speak were
received. Written comments on the 2004 Proposed Regulations were
received. After consideration of the written comments, and in light of
the statutory changes made by the 2006 Act, the need for regulatory
guidance on those statutory changes, and the close connection between
that needed guidance and the guidance in the 2004 Proposed Regulations,
the IRS and the Treasury Department determined to issue coordinated
guidance as temporary regulations under TD 9339 which were published in
the Federal Register on July 16, 2007 (72 FR 38767) and which became
effective as of September 14, 2007 (the ``Temporary Regulations''),
with an opportunity for public comment in the corresponding proposed
regulations (the ``2007 Proposed Regulations''). The 2004 Proposed
Regulations were withdrawn. No public hearing was requested and no
written comments were received pursuant to the 2007 Proposed
Regulations.
Accordingly, the IRS and the Treasury Department adopt the 2007
Proposed Regulations, in substantially the same form as the 2007
Proposed Regulations, as final regulations by this Treasury Decision.
Effective/Applicability Dates
In general, except as otherwise provided, these final regulations
generally apply to QZABs issued under section 1397E that are sold on or
after September 14, 2007.
Pursuant to section 313(b) of the 2008 Act, effective for QZABs
that are sold on or after October 3, 2008, section 1397E is
inapplicable and successor modified statutory provisions for QZABs
apply under sections 54A and 54E. These final regulations generally do
not apply to QZABs issued under sections 54A and 54E. However, Notice
2009-30, 2009-16 IRB 852 (April 20, 2009) and Notice 2010-22, 2010-10
IRB 435 (March 8, 2010) (relating to 2009 and 2010 volume cap
allocations for QZABs respectively), provide that for QZABs issued
under sections 54A and 54E that are sold on or after October 4, 2008,
pending the promulgation and effective date of future administrative or
regulatory guidance, taxpayers may rely on the interim guidance
provided in these notices and, to the extent not inconsistent with
these notices and the provisions of sections 54A and 54E, the Temporary
Regulations issued under section 1397E. See Sec. 601.601
(d)(2)(ii)(b).
The final regulations include a limited reliance provision for
QZABs issued under sections 54A and 54E. Under this reliance provision,
except to the extent inconsistent with the successor statutory
provisions for QZABs in sections 54A and 54E and public administrative
or regulatory guidance under those provisions and except as otherwise
provided in a special restriction against reliance on the remedial
action provisions in the final regulations, issuers and taxpayers may
rely on the final regulations for QZABs that are issued under sections
54A and 54E. In the case of QZABs that are issued under sections 54A
and 54E for which the issuer elects the Federal direct payment subsidy
option under section 6431(f), issuers and taxpayers may not rely on the
remedial action provisions in Sec. 1.1397E-1(h) of the final
regulations. The IRS and Treasury Department expect to announce
appropriate remedial actions tailored to bonds involving the Federal
direct payment subsidy option under section 6431 in future public
guidance.
In addition, except as otherwise provided, Sec. 1.1397E-1(h)(2),
(h)(3), (h)(4), (i), and (j) of the final regulations regarding the
five-year spending period, the arbitrage investment restrictions, and
the information reporting requirement added by the 2006 Act apply to
bonds issued under section 1397E pursuant to allocations of the
national qualified zone academy bond volume cap authority arising in
calendar years after 2005 and sold on or after September 14, 2007.
In addition, issuers and taxpayers also may apply the final
regulations in whole, but not in part, to bonds issued under section
1397E that are sold before September 14, 2007.
Certain other special effective dates apply to particular
provisions under Sec. 1.1397E-1(m).
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. It is hereby
certified that the collection of information contained in this
regulation will not have a significant economic impact on a substantial
number of small entities. Accordingly, a regulatory flexibility
analysis is not required. The collection of information in this
proposed regulation is in Sec. 1.1397E-1(h)(8). This collection of
information is required by the IRS to verify compliance with section
1397E. This information will be used to identify issuers of qualified
zone academy bonds that have established a defeasance escrow as a
remedial action taken because of failure to satisfy certain
requirements of section 1397E. The collection of information is
required to obtain or retain a benefit. The likely respondents are
states or local governments that issue qualified zone academy bonds.
The estimated number of respondents is 6, and the estimated average
annual burden hours per respondent is 30 minutes. In addition, the
establishment of a defeasance escrow need only be reported once.
Accordingly, the number of, and the burden on, affected small entities
is not significant. Pursuant to section 7805(f) of the Code, the notice
of proposed rulemaking preceding this regulation has been submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small businesses.
Drafting Information
The principal author of these regulations is Zoran Stojanovic,
Office of Associate Chief Counsel, IRS (Financial Institutions and
Products). However, other personnel from the IRS and the Treasury
Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entry for ``1.1397E-1T'' and revising the entry for ``Sec.
1.1397E-1'' to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1397E-1 also issued under 26 U.S.C. 1397E. * * *
[[Page 44904]]
0
Par. 2. Section 1.1397E-1 is amended by revising paragraphs (a), (d),
(h), (i), (j) and (m) to read as follows:
Sec. 1.1397E-1 Qualified zone academy bonds.
(a) In general--(1) Overview. In general, a qualified zone academy
bond (QZAB or QZABs) is a taxable bond issued by a state or local
government the proceeds of which are used to improve certain eligible
public schools. An eligible taxpayer that holds a QZAB generally is
allowed annual Federal income tax credits in lieu of periodic interest
payments. These credits compensate the eligible taxpayer for lending
money to the issuer and function as payments of interest on the bond.
Accordingly, this section generally treats the allowance of a credit as
if it were a payment of interest on the bond. This section also
provides other rules for QZABs, including rules governing the credit
rate, the private business contribution requirement, the maximum term,
use and expenditure of proceeds, remedial actions, eligible issuers,
arbitrage investment restrictions, and information reporting.
(2) Certain definitions--(i) In general. For purposes of this
section, except as otherwise provided in this section, the following
definitions apply: the definitions set forth in this section; the
definitions used for general tax-exempt bond purposes in Sec. 1.150-1;
and the definitions used for purposes of the arbitrage investment
restrictions on tax-exempt bonds in Sec. 1.148-1(b).
(ii) Applicable definition of proceeds--(A) Use and expenditure
provisions. Except as provided in paragraphs (a)(2)(ii)(B) and
(a)(2)(ii)(C) of this section, for purposes of all applicable
requirements regarding use and expenditure of proceeds of QZABs under
section 1397E and this section, ``proceeds'' means ``sale proceeds,''
as defined in Sec. 1.148-1(b), plus ``investment proceeds,'' as
defined in Sec. 1.148-1(b).
(B) Private business contribution requirement. For purposes of the
private business contribution requirement of section 1397E(d)(2),
``proceeds'' means ``sale proceeds,'' as defined in Sec. 1.148-1(b).
(C) Arbitrage investment restrictions. For purposes of the scope of
application of the arbitrage investment restrictions under section
1397E(g) and paragraph (i) of this section, ``proceeds'' generally
means gross proceeds, as defined in Sec. 1.148-1(b). In addition, in
applying the arbitrage investment restrictions under paragraph (i) of
this section and under section 148, the various applicable definitions
of the various types of proceeds of tax-exempt bonds under Sec. 1.148-
1(b) shall apply.
* * * * *
(d) Maximum term. The maximum term for a QZAB is determined under
section 1397E(d)(3) by using a discount rate equal to 110 percent of
the long-term adjusted applicable Federal rate (AFR), compounded semi-
annually, for the month in which the bond is sold. The Internal Revenue
Service publishes this figure each month in a revenue ruling that is
published in the Internal Revenue Bulletin. See Sec.
601.601(d)(2)(ii)(b) of this chapter. A bond is sold on the sale date,
as defined in Sec. 1.150-1(c)(6), which is the first day on which
there is a binding contract in writing for the sale or exchange of the
bond.
* * * * *
(h) Use of proceeds--(1) In general. Section 1397E(d)(1) provides
that a bond issued as part of an issue is a QZAB only if, among other
requirements, at least 95 percent of the proceeds of the issue are to
be used for a qualified purpose with respect to a qualified zone
academy established by an eligible local education agency (as defined
in section 1397E(d)(4)(B)), and the issue meets the requirements of
section 1397E(f) and (g). Section 1397E(d)(5) defines qualified
purpose, with respect to any qualified zone academy, as rehabilitating
or repairing the public school facility in which such academy is
established, providing equipment for use at such academy, developing
course materials for education to be provided at such academy, and
training teachers and other school personnel in such academy. Section
1397E(d)(4)(A) defines qualified zone academy as any public school (or
academic program within a public school) that is established by and
operated under the supervision of an eligible local education agency to
provide education or training below the postsecondary level and that
meets the requirements of section 1397E(d)(4)(A)(i), (ii), (iii) and
(iv).
(2) Use of proceeds requirements. An issue meets the requirements
of sections 1397E (d)(1)(A) and (f) only if--
(i) The issuer reasonably expects, as of the issue date of the
issue, that--
(A) At least 95 percent of the proceeds from the sale of the issue
are to be spent for qualified purposes with respect to qualified zone
academies within the 5-year period beginning on the issue date of the
QZAB;
(B) A binding commitment with a third party to spend at least 10
percent of the proceeds from the sale of the issue will be incurred
within the 6-month period beginning on the issue date of the QZAB;
(C) At least 95 percent of the proceeds from the sale of the issue
will be spent for qualified purposes with respect to a qualified zone
academy with due diligence (with due diligence measured by the
reasonableness standard under Sec. 1.148-1(b)); and
(D) At least 95 percent of the proceeds of the issue will be used
for qualified purposes with respect to a qualified zone academy for the
entire term of the issue (without regard to any redemption provision);
and
(ii) Except as otherwise provided in paragraph (h)(8) of this
section, at least 95 percent of the proceeds of the issue are actually
used for qualified purposes with respect to a qualified academy for the
entire term of the issue (without regard to any redemption provision).
(3) Extension of 5-year period. The Commissioner may extend the
period described in paragraph (h)(2)(i)(A) of this section if the
issuer, prior to the end of such period, submits a private ruling
request, and establishes to the satisfaction of the Commissioner that--
(i) The failure to satisfy the 5-year spending requirement is due
to reasonable cause; and
(ii) The expenditure of at least 95 percent of the proceeds from
the sale of the issue for a qualified purpose with respect to a
qualified zone academy will continue to proceed with due diligence.
(4) Unspent proceeds. For purposes of paragraphs (h)(2)(i)(D) and
(h)(2)(ii) of this section, during the period described in paragraph
(h)(2)(i)(A) of this section, including any extension under paragraph
(h)(3) of this section, unspent proceeds are treated as used for a
qualified purpose with respect to a qualified zone academy if the
issuer reasonably expects to proceed with due diligence to spend those
proceeds for a qualified purpose with respect to a qualified zone
academy during that period.
(5) Proceeds spent for rehabilitation, repair or equipment--(i) In
general. Under section 1397E(d)(5)(A) the term qualified purpose with
respect to any qualified zone academy includes rehabilitating or
repairing the public school facility in which such academy is
established. For this purpose, in determining whether proceeds are
spent for rehabilitation, rules similar to those under section 47(c)
(other than sections 47(c)(1)(B) and 47(c)(2)(B)(iv)) shall apply.
Under section 1397E(d)(5)(B) the term qualified purpose also includes
providing equipment for use at such academy. If proceeds of an issue
are spent for a purpose described in section
[[Page 44905]]
1397E(d)(5)(A) or (B) with respect to a qualified zone academy, then
those proceeds are treated as used for a qualified purpose with respect
to the academy during any period after such expenditure that--
(A) The property financed with those proceeds is used for the
purposes of the academy; and
(B) The academy maintains its status as a qualified zone academy
under section 1397E(d)(4).
(ii) Retirement from service. The retirement from service of
financed property due to normal wear or obsolescence does not cause the
property to fail to be used for a qualified purpose with respect to a
qualified zone academy.
(6) Proceeds spent to develop course materials or train teachers.
Section 1397E(d)(5)(C) and (D) provides that the term qualified purpose
with respect to any qualified zone academy includes developing course
materials for education to be provided at such academy, and training
teachers and other school personnel in such academy. If proceeds of an
issue are spent for a purpose described in section 1397E(d)(5)(C) or
(D) with respect to a qualified zone academy, then those proceeds are
treated as used for a qualified purpose with respect to the academy
during any period after such expenditure.
(7) Special rule for determining status as qualified zone academy.
Section 1397E(d)(4)(A)(iv) provides that a public school (or academic
program within a public school) is a qualified zone academy only if,
among other requirements, the public school is located in an
empowerment zone or enterprise community (as defined in section 1393),
or there is a reasonable expectation (as of the issue date of the
issue) that at least 35 percent of the students attending the school or
participating in the program (as the case may be) will be eligible for
free or reduced-cost lunches under the school lunch program established
under the Richard B. Russell National School Lunch Act. For purposes of
determining whether an issue complies with section 1397E(d)(4)(A)(iv)--
(i) A public school is treated as located in an empowerment zone or
enterprise community for the entire term of the issue if the public
school is located in an empowerment zone or enterprise community on the
issue date of the issue; and
(ii) The determination of whether there is a reasonable expectation
(as of the issue date of the issue) that at least 35 percent of the
students attending the school or participating in the program (as the
case may be) will be eligible for free or reduced-cost lunches under
the school lunch program established under the Richard B. Russell
National School Lunch Act is based on expectations regarding the one-
year period following the issue date.
(8) Remedial actions--(i) General rule. If less than 95 percent of
the proceeds of an issue are properly used (as determined under
paragraph (h)(8)(ii)(D) of this section), the issue will be treated as
meeting the requirements of section 1397E(d)(1)(A) if the issue met the
requirements of paragraph (h)(2)(i) of this section and a remedial
action is taken under paragraph (h)(8)(ii) or (iii) of this section.
(ii) Redemption or defeasance--(A) In general. A remedial action is
taken under this paragraph (h)(8)(ii) if the requirements of paragraphs
(h)(8)(ii)(B) and (C) of this section are met.
(B) Retirement of nonqualified bonds--(1) In general. The
requirements of this paragraph (h)(8)(ii)(B) are met if--
(i) All of the nonqualified bonds of the issue (as determined under
Sec. 1.142-2(e)) are redeemed within 90 days after the date on which
the failure to properly use proceeds occurs; or
(ii) To the extent proceeds of the issue that have been actually
spent for a qualified purpose with respect to a qualified zone academy,
if any nonqualified bonds of the issue are not redeemed within 90 days
after the date on which the failure to properly use such proceeds
occurs (the unredeemed nonqualified bonds), a defeasance escrow is
established for the unredeemed nonqualified bonds within 90 days after
the date on which the failure to properly use proceeds occurs.
(2) Special rule for dispositions for cash. If the failure to
properly use proceeds occurs because of a disposition of financed
property described in section 1397E(d)(5)(A) or (B) and the
consideration for the disposition is exclusively cash, the requirements
of this paragraph (h)(8)(ii)(B) are met if all of the disposition
proceeds (as defined in paragraph (h)(8)(iv) of this section) are used
within 90 days after the date of the disposition to redeem, or
establish a defeasance escrow for, the nonqualified bonds (as
determined under Sec. 1.142-2(e)).
(3) Definition of defeasance escrow. For purposes of this section,
a defeasance escrow is an irrevocable escrow established to retire
nonqualified bonds on the earliest call date after the date on which
the failure to properly use proceeds occurs in an amount that is
sufficient to retire nonqualified bonds on that call date. At least 90
percent of the weighted average amount in a defeasance escrow must be
invested in investments (as defined in Sec. 1.148-1(b)), except that
no amount in a defeasance escrow may be invested in any investment the
obligor (or any person that is a related party with respect to the
obligor within the meaning of Sec. 1.150-1(b)) of which is a user of
proceeds of the bonds. All purchases or sales of an investment in a
defeasance escrow must be made at the fair market value of the
investment within the meaning of Sec. 1.148-5(d)(6).
(C) Additional rules--(1) Limitation on source of funding. Proceeds
of an issue of QZABs (other than unspent proceeds of the issue for
which the failure to properly use proceeds occurs) must not be used to
redeem or defease nonqualified bonds under paragraph (h)(8)(ii)(B) of
this section.
(2) Rebate requirement. The issuer must pay to the United States,
at the same time and in the same manner as rebate amounts are required
to be paid under Sec. 1.148-3 (or at such other time or in such other
manner as the Commissioner may prescribe), any investment earnings on
amounts in a defeasance escrow established under paragraph
(h)(8)(ii)(B) of this section that are in excess of the yield on the
issue of QZABs with respect to which the defeasance escrow was
established. For this purpose, the first computation period begins on
the date on which the defeasance escrow is established.
(3) Notice of defeasance. The issuer must provide written notice to
the Commissioner, at the place designated in Sec. 1.150-5(a), of the
establishment of the defeasance escrow within 90 days of the date the
defeasance escrow is established.
(D) When a failure to properly use proceeds occurs--(1) Unspent
proceeds. For unspent proceeds, a failure to properly use proceeds
occurs on the earliest of--
(i) The first date on which the public school (or academic program
within the public school) fails to constitute a qualified zone academy;
(ii) The first date on which the issuer fails to have a reasonable
expectation to proceed with due diligence to spend at least 95 percent
of the proceeds of the issue for a qualified purpose with respect to a
qualified zone academy; or
(iii) The last day of the period described in paragraph
(h)(2)(i)(A) of this section, including any extension, if less than 95
percent of the proceeds of the issue are actually spent for a qualified
purpose with respect to a qualified zone academy.
(2) Proceeds spent for rehabilitation, repair or equipment. For
proceeds that
[[Page 44906]]
have been spent for a purpose described in section 1397E(d)(5)(A) or
(B) with respect to a qualified zone academy, a failure to properly use
proceeds occurs on the earlier of--
(i) The first date on which the public school (or academic program
within the public school) fails to constitute a qualified zone academy;
and
(ii) The first date on which an action is taken that causes the
issuer to fail actually to use at least 95 percent of the proceeds of
the issue for a qualified purpose with respect to a qualified zone
academy.
(3) Proceeds spent for course materials or training. If proceeds
have been spent for a purpose described in section 1397E(d)(5)(C) or
(D) with respect to a qualified zone academy, no event subsequent to
such expenditure shall constitute a failure to properly use such
proceeds.
(iii) Alternative use of disposition proceeds. A remedial action is
taken under this paragraph (h)(8)(iii) if all of the requirements of
paragraphs (h)(8)(iii)(A) through (D) of this section are met--
(A) The failure to properly use proceeds (as determined under
paragraph (h)(8)(ii)(D) of this section) is a disposition of financed
property described in section 1397E(d)(5)(A) or (B) and the
consideration for the disposition is exclusively cash;
(B) The issuer reasonably expects as of the date of the disposition
that--
(1) All of the disposition proceeds will be spent within the two-
year period beginning with the date of the disposition for a qualified
purpose with respect to a qualified zone academy; or
(2) To the extent not expected to be so spent, the disposition
proceeds will be used within 90 days after the date of the disposition
to redeem or defease bonds in a manner that meets the requirements of
paragraph (h)(8)(ii) of this section;
(C) The disposition proceeds are treated as proceeds for purposes
of section 1397E; and
(D) If all of the disposition proceeds are not actually used in the
manner described in paragraph (h)(8)(iii)(B) of this section, the
remainder of such amounts are used within 90 days after the end of the
period described in paragraph (h)(8)(iii)(B)(1) of this section for a
remedial action that meets the requirements of paragraph (h)(8)(ii) of
this section.
(iv) Definition of disposition proceeds and allocation among
multiple funding sources. For purposes of this paragraph (h)(8),
disposition proceeds means disposition proceeds, as defined in Sec.
1.141-12(c)(1), plus amounts derived from investing disposition
proceeds. If property has been financed with an issue of QZABs and one
or more other funding sources, any disposition proceeds from that
property are allocated to the issue under the principles of Sec.
1.141-12(c)(3).
(9) Payment of principal, interest or redemption price--(i) In
general. Except as provided in paragraphs (h)(9)(ii) and (h)(9)(iii) of
this section, the use of proceeds of a bond to pay principal, interest,
or redemption price of the bond or another bond is not a qualified
purpose within the meaning of section 1397E(d)(5).
(ii) Exception for certain eligible reimbursements of interim
refinancings. The use of proceeds of a bond (the refinancing bond) to
pay principal, interest, or redemption price of another bond (the prior
bond) is a qualified purpose within the meaning of section 1397E(d)(5)
to the extent that--
(A) The prior bond was not a QZAB (and, in the case of a series of
refinancings, no earlier bond in the series was a QZAB);
(B) The proceeds of the prior bond (or the original bond in the
case of a series of refinancings, as applicable) were spent for a
qualified purpose under section 1397E(d)(5) with respect to a qualified
zone academy (the original expenditure); and
(C) The issuer makes a valid reimbursement allocation to allocate
the proceeds of the refinancing bond to the payment of the original
expenditure (the reimbursement allocation), which allocation satisfies
the requirements for reimbursements under paragraph (h)(10) of this
section. For purposes of applying the rules for reimbursement, a
refinancing bond which otherwise meets the requirements of this
paragraph (h)(9)(ii) is eligible for reimbursement and is not treated
as a disqualified refunding under Sec. 1.150-2(g).
(iii) Reissuance of a QZAB. For purposes of determining whether the
establishing of a defeasance escrow under paragraph
(h)(8)(ii)(B)(1)(ii) of this section results in an exchange under Sec.
1.1001-1(a), the QZAB is treated as a tax-exempt bond under Sec.
1.1001-3(e)(5)(ii)(B)(1).
(10) Reimbursement. An expenditure for a qualified purpose may be
reimbursed with proceeds of a QZAB. For this purpose, rules similar to
those on reimbursement of expenditures in Sec. 1.142-4(b) and Sec.
1.150-2 shall apply. In applying these reimbursement rules,
expenditures eligible for reimbursement under Sec. 1.150-2(d)(3) shall
be deemed to mean any expenditure for a qualified purpose under section
1397E(d)(5).
(i) Arbitrage investment restrictions--(1) In general. Under
section 1397E(g) and this paragraph (i), and except as otherwise
provided in this paragraph (i), the arbitrage investment restrictions
and rebate requirements under section 148 and Sec. Sec. 1.148-1
through 1.148-11, inclusive, and the exceptions to those restrictions,
apply broadly to gross proceeds of QZABs issued under section 1397E to
the same extent and in the same manner as they apply to gross proceeds
of tax-exempt state or local governmental bonds. For this purpose,
references in those sections to tax-exempt bonds generally shall be
deemed to refer to QZABs and, to the extent that any particular
arbitrage restriction depends on whether bonds are private activity
bonds under section 141, the determination of whether QZABs are private
activity bonds shall be based on the general definition of private
activity bonds under section 141. In applying section 148 and the
regulations under that section to QZABs, the modifications set forth in
paragraphs (i)(2) through (i)(6) of this section shall apply.
(2) 5-year temporary period exception to arbitrage yield
restriction. If an issue of QZABs meets the requirements of section
1397E(f)(1) and paragraph (h)(2)(i) of this section, then the proceeds
of the issue of QZABs are treated as qualifying for a 5-year temporary
period exception to arbitrage yield restriction under Sec. 1.148-
2(e)(2) beginning on the issue date of the issue.
(3) Disregard QZAB credit in QZAB yield for arbitrage purposes. In
determining the yield on an issue of QZABs for arbitrage purposes under
Sec. 1.148-4, the QZAB credit allowed under section 1397E(a) is
disregarded.
(4) Non-AMT tax-exempt bond investment exception inapplicable. The
exception to arbitrage yield restriction for investments of gross
proceeds of tax-exempt bonds in specified tax-exempt bond investments
not subject to section 148(b)(3)(B) (relating to an exception to the
definition of ``investment property'' for specified tax-exempt bonds)
and Sec. 1.148-2(d)(2)(v) (relating to a corresponding exception to
arbitrage yield limitations) is inapplicable.
(5) Application of small issuer exception to the arbitrage rebate
requirement. Except as otherwise provided in paragraph (i)(6) of this
section, for purposes of the small issuer exception to the arbitrage
rebate requirement under section 148(f)(4)(D) and Sec. 1.148-8, QZABs
that are actually issued or reasonably expected to be issued by the
QZAB issuer (and applicable entities aggregated under section
148(f)(4)(D)) within a calendar
[[Page 44907]]
year are taken into account in measuring the applicable size
limitation.
(6) Certain defeasance escrow earnings. With respect to a
defeasance escrow established in a remedial action for an issue of
QZABs that meets the special rebate requirement under paragraph
(h)(8)(ii)(C)(2) of this section, the QZAB issuer is treated as
ineligible for the small issuer exception to arbitrage rebate under
section 148(f)(4)(D) and paragraph (i)(5) of this section and
compliance with that special rebate requirement is treated as
satisfying applicable arbitrage investment restrictions under section
148 for that defeasance escrow.
(j) Information reporting requirement. Under section 1397E(h) and
this paragraph (j), issuers of QZABs are required to submit information
reporting returns to the IRS similar to the information reporting
returns required to be submitted to the IRS under section 149(e) for
tax-exempt state or local governmental bonds at the same time and in
the same manner as those reports are required to be submitted to the
IRS on such forms as shall be prescribed by the Commissioner for such
purpose.
* * * * *
(m) Effective/applicability dates--(1) In general. Except as
otherwise provided in this paragraph (m), this section applies to bonds
issued under section 1397E that are sold on or after September 14,
2007.
(2) Special effective dates--(i) Effective dates for paragraphs
(h)(2), (h)(3), (h)(4), (i), and (j) of this section in general.
Paragraphs (h)(2), (h)(3), (h)(4), (i), and (j) of this section apply
to bonds issued under section 1397E pursuant to allocations of the
national qualified zone academy bond volume cap authority for calendar
years after 2005 and sold on or after September 14, 2007.
(ii) Permissive retroactive application--(A) In general. Except as
otherwise provided in this paragraph (m), issuers and taxpayers may
apply this section in whole, but not in part, to bonds issued under
section 1397E that are sold before September 14, 2007.
(B) Special rule for certain provisions. For purposes of the
permissive retroactive application rule in paragraph (m)(2)(ii)(A) of
this section, paragraphs (h)(2), (h)(3), (h)(4), (i), and (j) of this
section need not be applied to any bonds issued under section 1397E to
which those provisions do not otherwise apply under the general
effective date provisions for those provisions in paragraph (m)(2)(i)
of this section.
(C) Definition of proceeds. Issuers and taxpayers may apply
paragraph (h) of this section, without regard to the definition of
proceeds in paragraph (a)(2)(ii) of this section, to bonds issued under
section 1397E that are sold before September 14, 2007.
(D) Bonds issued before July 1, 1999. Paragraphs (b) and (h)(10) of
this section may not be applied to bonds issued under section 1397E
that are issued before July 1, 1999.
(3) Scope of reliance for bonds issued under sections 54A and 54E.
Except to the extent inconsistent with the successor statutory
provisions for QZABs in sections 54A and 54E or applicable public
administrative or regulatory guidance under those provisions and except
as otherwise provided in this paragraph (m)(3), issuers and taxpayers
may apply these regulations to QZABs issued under sections 54A and 54E
that are sold on or after October 3, 2008. In the case of QZABs that
are issued under sections 54A and 54E for which the issuer makes an
irrevocable election under section 6431(f) to receive payments with
respect to credits under section 6431, issuers and taxpayers may not
apply the remedial action provisions under paragraph (h)(8) of this
section.
Sec. 1.1397E-1T [Removed]
0
Par. 3. Section 1.1397E-1T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 4. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
0
Par. 5. In Sec. 602.101, paragraph (b) is amended by removing the
entry for ``1.1397E-1T''and adding the following entry in numerical
order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.1397E-1............................................... 1545-1908
* * * * *
------------------------------------------------------------------------
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: July 16, 2010.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-18678 Filed 7-29-10; 8:45 am]
BILLING CODE 4830-01-P