83 FR 27302 - Arbitrage Investment Restrictions on Tax-Exempt Bonds
DEPARTMENT OF THE TREASURY
Internal Revenue Service Federal Register Volume 83, Issue 113 (June 12, 2018)
Internal Revenue Service
Federal Register Volume 83, Issue 113 (June 12, 2018)
| Page Range | 27302-27303 | |
| FR Document | 2018-12565 |
[Federal Register Volume 83, Number 113 (Tuesday, June 12, 2018)] [Proposed Rules] [Pages 27302-27303] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-12565] ======================================================================== Proposed Rules Federal Register ________________________________________________________________________ This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. ======================================================================== Federal Register / Vol. 83, No. 113 / Tuesday, June 12, 2018 / Proposed Rules [[Page 27302]] DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-106977-18] RIN 1545-BO77 Arbitrage Investment Restrictions on Tax-Exempt Bonds AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. ----------------------------------------------------------------------- SUMMARY: This document contains proposed regulations regarding the arbitrage investment restrictions under section 148 of the Internal Revenue Code (Code) applicable to tax-exempt bonds and other tax- advantaged bonds issued by State and local governments. The proposed regulations would clarify existing regulations regarding the definition of ``investment-type property'' covered by arbitrage restrictions by expressly providing an exception for investments in capital projects that are used in furtherance of the public purposes of the bonds. The proposed regulations affect State and local governmental issuers of these bonds and potential investors in capital projects financed with these bonds. DATES: Comments and requests for a public hearing must be received by September 10, 2018. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-106977-18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG- 106977-18), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (REG-106977-18). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Spence Hanemann, (202) 317-6980; concerning submissions of comments and requesting a hearing, Regina L. Johnson, (202) 317-6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) on the arbitrage investment restrictions under section 148 of the Code (Proposed Regulations). 1. In General In general, under section 103, interest received by holders of eligible bonds issued by State and local governments is exempt from Federal income tax. As a result, tax-exempt State or local bonds generally have lower borrowing costs. To qualify for the tax exemption, State or local bonds must satisfy various eligibility requirements under sections 141 to 150, including the arbitrage investment restrictions under section 148. The arbitrage investment restrictions under section 148 limit the investment of proceeds of tax-exempt bonds in higher yielding investments and require rebate to the Federal government of certain excess earnings on higher yielding investments. On June 18, 1993, the Department of the Treasury (Treasury Department) and the IRS published comprehensive final regulations in the Federal Register (TD 8476, 58 FR 33510) on the arbitrage investment restrictions and related provisions for tax-exempt bonds under sections 103, 148, 149, and 150 and, since that time, those final regulations have been amended in certain limited respects (these 1993 regulations and the amendments thereto collectively are referred to as the Existing Regulations). 2. Investment Property Covered by Arbitrage Restrictions Section 148(a) defines a taxable ``arbitrage bond'' generally to mean any bond issued as part of an issue any portion of the proceeds of which are reasonably expected to be used or are intentionally used to acquire ``higher yielding investments'' or to replace funds so used. Section 148(b)(1) defines the term ``higher yielding investments'' to mean any ``investment property'' that produces a yield over the term of the issue that is materially higher than the yield on the issue. Section 148(b)(2) defines the term ``investment property'' to include any security (within the meaning of section 165(g)(2)(A) or (B)), any obligation, any annuity contract, certain residential real property for family units located outside the jurisdiction of the issuer that is financed with bonds other than private activity bonds, and any ``investment-type property.'' Section 1.148-1(e)(1) of the Existing Regulations defines a catch- all category of ``investment-type property'' to include any property (other than securities, obligations, annuity contracts, and covered residential real property for family units under section 148(b)(2)(A), (B), (C), and (E)) ``that is held principally as a passive vehicle for the production of income.'' For this purpose, Sec. 1.148-1(e)(1) of the Existing Regulations provides that the production of income includes any benefit based on the time value of money. Explanation of Provisions 1. Proposed Sec. 1.148-1(e)(4): Exception to Investment-Type Property Definition for Certain Capital Projects Institutional investors have suggested clarification of the scope of the regulatory definition of investment-type property under Sec. 1.148-1(e)(1) to ensure that the definition does not impede greater capital investment in public infrastructure. The legislative history to the Tax Reform Act of 1986, Public Law 99-514, 100 Stat. 2085, indicates that Congress intended to limit the scope of the arbitrage restriction on investment-type property so that it did not extend to investments in capital projects in furtherance of the public purposes of the bonds. In this regard, the House Report to the Tax Reform Act of 1986 included the following statement about the intended scope of the definition of investment-type property: ``The restriction would not apply, however, to real or tangible personal property acquired with bond proceeds for reasons other than investment (e.g., courthouse facilities financed with bond proceeds).'' H.R. Rep. No. 99-426, at 552 (1985), 1986-3 (vol. 2) C.B. 457; see also S. Rep. No. 99-313, at 844 (1986), 1986-3 (vol. 3) C.B. 682 (containing a statement substantially identical to that in the House report); H.R. Rep. No. 99- [[Page 27303]] 841, at II-747 (1986) (Conf. Rep.), 1986-3 (vol. 4) C.B. 608 (stating that the conference agreement follows the House bill and the Senate amendment on this restriction). To clarify the scope of the investment-type property definition consistent with Congressional intent reflected in the legislative history, the Proposed Regulations would provide an express exception to the definition of investment-type property for capital projects that further the public purposes for which the tax-exempt bonds were issued. For example, investment-type property does not include a courthouse financed with governmental bonds or an eligible exempt facility under section 142, such as a public road, financed with private activity bonds. 2. Applicability Dates and Reliance The proposed amendments to the definition of investment-type property in the Proposed Regulations are proposed to apply to bonds sold on or after the date that is 90 days after the date of publication of a Treasury Decision adopting these rules as final regulations in the Federal Register. Issuers may apply the Proposed Regulations to bonds that are sold before the applicability date provided in a Treasury Decision adopting these rules as final regulations in the Federal Register. Special Analyses This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations. Because these regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small entities. Comments and Requests for Public Hearing Before the Proposed Regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all aspects of the proposed rules. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the hearing will be published in the Federal Register. Drafting Information The principal authors of these regulations are Spence Hanemann of the Office of Associate Chief Counsel (Financial Institutions and Products) and Vicky Tsilas, formerly of the Office of Associate Chief Counsel (Financial Institutions and Products). However, other personnel from the Treasury Department and the IRS participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1--INCOME TAXES 0 Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * 0 Par. 2. Section 1.148-0(c) is amended by adding entries for Sec. Sec. 1.148-1(e)(4) and 1.148-11(n) to read as follows: Sec. 1.148-0 Scope and table of contents. * * * * * (c) * * * Sec. 1.148-1 Definitions and elections. * * * * * (e) * * * (4) Exception for certain capital projects. * * * * * Sec. 1.148-11 Effective/applicability dates. * * * * * (n) Investment-type property. 0 Par. 3. Section 1.148-1 is amended by: 0 1. Revising the first sentence of paragraph (e)(1). 0 2. Adding paragraph (e)(4). The revision and addition read as follows: Sec. 1.148-1 Definitions and elections. * * * * * (e) Investment-type property--(1) In general. Except as otherwise provided in this paragraph (e), investment-type property includes any property, other than property described in section 148(b)(2)(A), (B), (C), or (E), that is held principally as a passive vehicle for the production of income. * * * * * * * * (4) Exception for certain capital projects. Investment-type property does not include real property or tangible personal property (for example, land, buildings, and equipment) that is used in furtherance of the public purposes for which the tax-exempt bonds are issued. For example, investment-type property does not include a courthouse financed with governmental bonds or an eligible exempt facility under section 142, such as a public road, financed with private activity bonds. * * * * * 0 Par. 4. Section 1.148-11 is amended by adding paragraph (n) to read as follows: Sec. 1.148-11 Effective/applicability dates. * * * * * (n) Investment-type property. Section 1.148-1(e)(1) and (4) apply to bonds sold on or after the date that is 90 days after the date of publication of a Treasury Decision adopting these rules as final regulations in the Federal Register. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. [FR Doc. 2018-12565 Filed 6-11-18; 8:45 am] BILLING CODE 4830-01-P
![27302
Proposed Rules Federal Register
Vol. 83, No. 113
Tuesday, June 12, 2018
This section of the FEDERAL REGISTER Spence Hanemann, (202) 317–6980; yield on the issue. Section 148(b)(2)
contains notices to the public of the proposed concerning submissions of comments defines the term ‘‘investment property’’
issuance of rules and regulations. The and requesting a hearing, Regina L. to include any security (within the
purpose of these notices is to give interested Johnson, (202) 317–6901 (not toll-free meaning of section 165(g)(2)(A) or (B)),
persons an opportunity to participate in the numbers). any obligation, any annuity contract,
rule making prior to the adoption of the final
SUPPLEMENTARY INFORMATION:
certain residential real property for
rules.
family units located outside the
Background jurisdiction of the issuer that is financed
DEPARTMENT OF THE TREASURY This document contains proposed with bonds other than private activity
amendments to the Income Tax bonds, and any ‘‘investment-type
Internal Revenue Service Regulations (26 CFR part 1) on the property.’’
arbitrage investment restrictions under Section 1.148–1(e)(1) of the Existing
26 CFR Part 1 Regulations defines a catch-all category
section 148 of the Code (Proposed
of ‘‘investment-type property’’ to
[REG–106977–18] Regulations).
include any property (other than
RIN 1545–BO77 1. In General securities, obligations, annuity
In general, under section 103, interest contracts, and covered residential real
Arbitrage Investment Restrictions on received by holders of eligible bonds property for family units under section
Tax-Exempt Bonds issued by State and local governments is 148(b)(2)(A), (B), (C), and (E)) ‘‘that is
exempt from Federal income tax. As a held principally as a passive vehicle for
AGENCY: Internal Revenue Service (IRS), the production of income.’’ For this
Treasury. result, tax-exempt State or local bonds
generally have lower borrowing costs. purpose, § 1.148–1(e)(1) of the Existing
ACTION: Notice of proposed rulemaking. Regulations provides that the
To qualify for the tax exemption, State
or local bonds must satisfy various production of income includes any
SUMMARY: This document contains benefit based on the time value of
proposed regulations regarding the eligibility requirements under sections
141 to 150, including the arbitrage money.
arbitrage investment restrictions under
section 148 of the Internal Revenue investment restrictions under section Explanation of Provisions
Code (Code) applicable to tax-exempt 148. The arbitrage investment
restrictions under section 148 limit the 1. Proposed § 1.148–1(e)(4): Exception to
bonds and other tax-advantaged bonds Investment-Type Property Definition for
issued by State and local governments. investment of proceeds of tax-exempt
bonds in higher yielding investments Certain Capital Projects
The proposed regulations would clarify
existing regulations regarding the and require rebate to the Federal Institutional investors have suggested
definition of ‘‘investment-type government of certain excess earnings clarification of the scope of the
property’’ covered by arbitrage on higher yielding investments. regulatory definition of investment-type
restrictions by expressly providing an On June 18, 1993, the Department of property under § 1.148–1(e)(1) to ensure
exception for investments in capital the Treasury (Treasury Department) and that the definition does not impede
projects that are used in furtherance of the IRS published comprehensive final greater capital investment in public
the public purposes of the bonds. The regulations in the Federal Register (TD infrastructure.
proposed regulations affect State and 8476, 58 FR 33510) on the arbitrage The legislative history to the Tax
local governmental issuers of these investment restrictions and related Reform Act of 1986, Public Law 99–514,
bonds and potential investors in capital provisions for tax-exempt bonds under 100 Stat. 2085, indicates that Congress
projects financed with these bonds. sections 103, 148, 149, and 150 and, intended to limit the scope of the
since that time, those final regulations arbitrage restriction on investment-type
DATES: Comments and requests for a
have been amended in certain limited property so that it did not extend to
public hearing must be received by investments in capital projects in
respects (these 1993 regulations and the
September 10, 2018. furtherance of the public purposes of
amendments thereto collectively are
ADDRESSES: Send submissions to: referred to as the Existing Regulations). the bonds. In this regard, the House
CC:PA:LPD:PR (REG–106977–18), Room Report to the Tax Reform Act of 1986
5203, Internal Revenue Service, P.O. 2. Investment Property Covered by included the following statement about
Box 7604, Ben Franklin Station, Arbitrage Restrictions the intended scope of the definition of
Washington, DC 20044. Submissions Section 148(a) defines a taxable investment-type property: ‘‘The
may be hand-delivered Monday through ‘‘arbitrage bond’’ generally to mean any restriction would not apply, however, to
Friday between the hours of 8 a.m. and bond issued as part of an issue any real or tangible personal property
4 p.m. to CC:PA:LPD:PR (REG–106977– portion of the proceeds of which are acquired with bond proceeds for reasons
pmangrum on DSK30RV082PROD with PROPOSALS
18), Courier’s Desk, Internal Revenue reasonably expected to be used or are other than investment (e.g., courthouse
Service, 1111 Constitution Avenue NW, intentionally used to acquire ‘‘higher facilities financed with bond
Washington, DC 20224, or sent yielding investments’’ or to replace proceeds).’’ H.R. Rep. No. 99–426, at
electronically via the Federal funds so used. Section 148(b)(1) defines 552 (1985), 1986–3 (vol. 2) C.B. 457; see
eRulemaking Portal at the term ‘‘higher yielding investments’’ also S. Rep. No. 99–313, at 844 (1986),
www.regulations.gov (REG–106977–18). to mean any ‘‘investment property’’ that 1986–3 (vol. 3) C.B. 682 (containing a
FOR FURTHER INFORMATION CONTACT: produces a yield over the term of the statement substantially identical to that
Concerning the proposed regulations, issue that is materially higher than the in the House report); H.R. Rep. No. 99–
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![Federal Register / Vol. 83, No. 113 / Tuesday, June 12, 2018 / Proposed Rules 27303
841, at II–747 (1986) (Conf. Rep.), 1986– upon request. A public hearing will be principally as a passive vehicle for the
3 (vol. 4) C.B. 608 (stating that the scheduled if requested in writing by any production of income. * * *
conference agreement follows the House person that timely submits written * * * * *
bill and the Senate amendment on this comments. If a public hearing is (4) Exception for certain capital
restriction). scheduled, notice of the date, time, and projects. Investment-type property does
To clarify the scope of the investment- place for the hearing will be published not include real property or tangible
type property definition consistent with in the Federal Register. personal property (for example, land,
Congressional intent reflected in the buildings, and equipment) that is used
legislative history, the Proposed Drafting Information
in furtherance of the public purposes for
Regulations would provide an express The principal authors of these which the tax-exempt bonds are issued.
exception to the definition of regulations are Spence Hanemann of the For example, investment-type property
investment-type property for capital Office of Associate Chief Counsel does not include a courthouse financed
projects that further the public purposes (Financial Institutions and Products) with governmental bonds or an eligible
for which the tax-exempt bonds were and Vicky Tsilas, formerly of the Office exempt facility under section 142, such
issued. For example, investment-type of Associate Chief Counsel (Financial as a public road, financed with private
property does not include a courthouse Institutions and Products). However, activity bonds.
financed with governmental bonds or an other personnel from the Treasury
eligible exempt facility under section * * * * *
Department and the IRS participated in
■ Par. 4. Section 1.148–11 is amended
142, such as a public road, financed their development.
with private activity bonds. by adding paragraph (n) to read as
List of Subjects in 26 CFR Part 1 follows:
2. Applicability Dates and Reliance
Income taxes, Reporting and § 1.148–11 Effective/applicability dates.
The proposed amendments to the recordkeeping requirements.
definition of investment-type property * * * * *
in the Proposed Regulations are Proposed Amendments to the (n) Investment-type property. Section
proposed to apply to bonds sold on or Regulations 1.148–1(e)(1) and (4) apply to bonds
after the date that is 90 days after the Accordingly, 26 CFR part 1 is sold on or after the date that is 90 days
date of publication of a Treasury proposed to be amended as follows: after the date of publication of a
Decision adopting these rules as final Treasury Decision adopting these rules
regulations in the Federal Register. PART 1—INCOME TAXES as final regulations in the Federal
Issuers may apply the Proposed Register.
Regulations to bonds that are sold before ■ Paragraph 1. The authority citation
Kirsten Wielobob,
the applicability date provided in a for part 1 continues to read in part as
Deputy Commissioner for Services and
Treasury Decision adopting these rules follows:
Enforcement.
as final regulations in the Federal Authority: 26 U.S.C. 7805 * * * [FR Doc. 2018–12565 Filed 6–11–18; 8:45 am]
Register. ■ Par. 2. Section 1.148–0(c) is amended BILLING CODE 4830–01–P
Special Analyses by adding entries for §§ 1.148–1(e)(4)
and 1.148–11(n) to read as follows:
This regulation is not subject to
review under section 6(b) of Executive § 1.148–0 Scope and table of contents.
DEPARTMENT OF DEFENSE
Order 12866 pursuant to the * * * * * GENERAL SERVICES
Memorandum of Agreement (April 11, (c) * * * ADMINISTRATION
2018) between the Department of the
Treasury and the Office of Management § 1.148–1 Definitions and elections.
NATIONAL AERONAUTICS AND
and Budget regarding review of tax * * * * * SPACE ADMINISTRATION
regulations. Because these regulations (e) * * *
do not impose a collection of (4) Exception for certain capital 48 CFR Part 15
information on small entities, the projects.
Regulatory Flexibility Act (5 U.S.C. * * * * * [FAR Case 2017–006; Docket No. 2017–
chapter 6) does not apply. Pursuant to 0006, Sequence No. 1]
section 7805(f) of the Code, this notice § 1.148–11 Effective/applicability dates.
RIN 9000–AN53
of proposed rulemaking will be * * * * *
submitted to the Chief Counsel for (n) Investment-type property. Federal Acquisition Regulation:
Advocacy of the Small Business ■ Par. 3. Section 1.148–1 is amended Exception From Certified Cost or
Administration for comment on its by: Pricing Data Requirements—Adequate
impact on small entities. ■ 1. Revising the first sentence of Price Competition
Comments and Requests for Public paragraph (e)(1).
■ 2. Adding paragraph (e)(4). AGENCY: Department of Defense (DoD),
Hearing General Services Administration (GSA),
The revision and addition read as
Before the Proposed Regulations are follows: and the National Aeronautics and Space
adopted as final regulations, Administration (NASA).
pmangrum on DSK30RV082PROD with PROPOSALS
consideration will be given to any § 1.148–1 Definitions and elections.
ACTION: Proposed rule.
comments that are submitted timely to * * * * *
the IRS as prescribed in this preamble (e) Investment-type property—(1) In SUMMARY: DoD, GSA, and NASA are
under the ADDRESSES heading. The general. Except as otherwise provided proposing to amend the Federal
Treasury Department and the IRS in this paragraph (e), investment-type Acquisition Regulation (FAR) to provide
request comments on all aspects of the property includes any property, other guidance to DoD, NASA, and the Coast
proposed rules. All comments will be than property described in section Guard, consistent with a section of the
available at www.regulations.gov or 148(b)(2)(A), (B), (C), or (E), that is held National Defense Authorization Act for
VerDate Sep<11>2014 14:09 Jun 11, 2018 Jkt 244001 PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 E:\FR\FM\12JNP1.SGM 12JNP1](https://thefederalregister.org/doc/83_FR_27415/page/2.svg)
Document Created: 2018-06-12 00:47:17
Document Modified: 2018-06-12 00:47:17
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Notice of proposed rulemaking. | |
| Dates | Comments and requests for a public hearing must be received by September 10, 2018. | |
| Contact | Concerning the proposed regulations, Spence Hanemann, (202) 317-6980; concerning submissions of comments and requesting a hearing, Regina L. Johnson, (202) 317-6901 (not toll-free numbers). | |
| FR Citation | 83 FR 27302 | |
| RIN Number | 1545-BO77 | |
| CFR Associated | Income Taxes and Reporting and Recordkeeping Requirements |
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