Qualified Zone Academy Bonds; Obligations of States and Political Subdivisions

[Federal Register Volume 64, Number 126 (Thursday, July 1, 1999)]
[Rules and Regulations]
[Pages 35573-35575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16621]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8826]
RIN 1545-AX23


Qualified Zone Academy Bonds; Obligations of States and Political 
Subdivisions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations that provide 
guidance to state and local government issuers of qualified zone 
academy bonds. These temporary regulations change the method of 
ascertaining the qualified zone academy bond credit rate and provide 
reimbursement rules. State and local governments that issue

[[Page 35574]]

qualified zone academy bonds will be affected by these temporary 
regulations. The text of these temporary regulations also serves as the 
text of the proposed regulations set forth in the notice of proposed 
rulemaking on this subject in the Proposed Rules section of this issue 
of the Federal Register.

DATES: Effective Date: These regulations are effective July 1, 1999.
    Applicability Date: For dates of applicability, see Sec. 1.1397E-
1T(j).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Timothy L. 
Jones (202) 622-3980 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 226(a) of the Taxpayer Relief Act of 1997, Public Law 105-
34 (111 Stat. 788), amended the Internal Revenue Code by redesignating 
section 1397E as 1397F and adding a new section 1397E. Section 1397E 
authorizes a new type of debt instrument known as a qualified zone 
academy bond. Temporary regulations interpreting section 1397E were 
published on January 7, 1998 (63 FR 671).

Explanation of Provisions

In General

    A qualified zone academy bond is a taxable bond issued by a state 
or local government, the proceeds of which are used to improve certain 
eligible public schools. In lieu of receiving periodic interest 
payments from the issuer, an eligible holder of a qualified zone 
academy bond is generally allowed annual federal income tax credits 
while the bond is outstanding. These credits compensate the holder for 
lending money to the issuer and function as payments of interest on the 
bond.

Credit Rate

    Under section 1397E(b)(2), the Secretary shall determine a credit 
rate for qualified zone academy bonds that the Secretary estimates will 
permit the bonds to be issued without discount and without interest 
cost to the issuer. Section 1.1397E-1T(b) provides that the credit rate 
for a qualified zone academy bond is equal to 110 percent of the long-
term applicable Federal rate(AFR), compounded annually, for the month 
in which the bond is issued.
    Comments have been received that the credit rate established by 
Sec. 1.1397E-1T(b) is generally lower than the rate required to permit 
the issuance of qualified zone academy bonds without discount and 
without interest cost to the issuer. Comments have also been received 
that a single credit rate applicable to obligations issued during a 
monthly period is too rigid and non-responsive to market interest rate 
movements.
    The revised regulations state that the Secretary will determine 
monthly (or more often as the Secretary deems necessary) a credit rate 
that will generally permit the issuance of qualified zone academy bonds 
without discount and without interest cost to the issuers. The revised 
regulations also provide that the manner for ascertaining the credit 
rate determined by the Secretary will be set forth in procedures, 
notices, forms, and instructions as prescribed by the Commissioner. A 
notice to be published in the Internal Revenue Bulletin will further 
provide that, until otherwise provided, the qualified zone academy bond 
credit rate will be determined daily and will be published on the 
Internet site for State and Local Government Bonds. The credit rate to 
be applied to a qualified zone academy bond will be the daily rate for 
the first day on which there is a binding contract in writing for the 
sale or exchange of the bond. Treasury and the Internal Revenue Service 
will monitor the issuance of qualified zone academy bonds to determine 
if future adjustments in the credit rate may be required.

Coordination with Reimbursement Rules

    These temporary regulations provide that the proceeds of a 
qualified zone academy bond may be used to reimburse a qualified 
expenditure (including any qualified non-capital expenditure) made 
prior to the date the bond was issued. The temporary regulations 
provide that rules similar to the reimbursement rules set forth in 
Sec. 1.150-2 will apply. Comments are solicited about whether these 
rules provide adequate guidance regarding reimbursement matters for 
issuers of qualified zone academy bonds.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 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) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. 
See also the Special Analysis Section of the notice of proposed 
rulemaking on qualified zone academy bonds in the Proposed Rules 
Section of this issue of the Federal Register. Pursuant to section 
7805(f) of the Internal Revenue Code, these temporary regulations will 
be submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Timothy L. Jones, 
Office of Assistant Chief Counsel (Financial Institutions & Products). 
However, other personnel from IRS and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.1397E-1T is amended as follows:
    1. Revising paragraphs (b) and (j).
    2. Redesignating paragraph (h) as paragraph (i).
    3. Adding new paragraph (h).
    The revisions and additions read as follows:


Sec. 1.1397E-1T  Qualified zone academy bonds (temporary).

* * * * *
    (b) Credit rate. The Secretary shall determine monthly (or more 
often as deemed necessary by the Secretary) the credit rate the 
Secretary estimates will generally permit the issuance of a qualified 
zone academy bond without discount and without interest cost to the 
issuer. The manner for ascertaining the credit rate for a qualified 
zone academy bond as determined by the Secretary shall be set forth in 
procedures, notices, forms, or instructions prescribed by the 
Commissioner.
* * * * *
    (h) Reimbursement. An expenditure for a qualified purpose may be 
reimbursed with proceeds of a qualified zone academy bond. For this 
purpose, rules similar to those in Sec. 1.150-2 shall apply.
* * * * *
    (j) Effective dates. Except as provided in this paragraph (j), this 
section applies to a qualified zone academy bond issued on or after 
January 1, 1998. Paragraph (b) and paragraph (h) of this section shall 
apply to a qualified zone academy bond sold on or after July 1, 1999. 
Paragraph (b) of this section as in effect

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on January 7, 1998 (See 26 CFR Part 1 as revised April 1, 1999), shall 
apply to a qualified zone academy bond sold prior to July 1, 1999. This 
section shall not apply to a qualified zone academy bond sold after 
January 5, 2001.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.

    Approved: June 22, 1999.
Donald C. Lubick,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 99-16621 Filed 6-30-99; 8:45 am]
BILLING CODE 4830-01-P