27258 Federal Register / Vol. 61, No. 106 / Friday, May 31, 1996 / Rules and Regulations

PART 762—[AMENDED]

6. Section 762.2 is amended by:

a. Redesignating paragraphs (b)(26)

through (b)(34) as (b)(27) through (b)(35)

respectively; and

b. adding a new paragraph (b)(26).

§ 762.2 Records to be retained.

* * * * *

(b) * * *

(26) Section 754.2(j)(3),

Recordkeeping requirements for deep

water ballast exchange.

* * * * *

Dated: May 28, 1996.

Iain S. Baird,

Deputy Assistant Secretary for Export

Administration.

[FR Doc. 96–13708 Filed 5–28–96; 2:33 pm]

BILLING CODE 3510–DT–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8673]

RIN 1545–AM01

Enterprise Zone Facility Bonds

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to enterprise zone

facility bonds issued by State and local

governments. These regulations reflect

changes to the law made by the

Omnibus Budget Reconciliation Act of

1993. These regulations affect issuers of

enterprise zone facility bonds.

EFFECTIVE DATE: These regulations are

effective May 31, 1996.

For dates of applicability of these

regulations to enterprise zone facility

bond issues, see § 1.1394–1(q) of these

regulations.

FOR FURTHER INFORMATION CONTACT:

Loretta J. Finger, (202) 622–3980 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On December 30, 1994, proposed

regulations (FI–72–88) were published

in the Federal Register (59 FR 67658) to

provide guidance under sections 141

(relating to private activity bonds and to

qualified bonds), 145 (relating to

qualified 501(c)(3) bonds), 148 (relating

to arbitrage), 150 (relating to change of

use), and 1394 (relating to enterprise

zone facility bonds). On June 8, 1995,

the IRS held a public hearing on the

proposed regulations. Written

comments responding to the proposed

regulations were received.

This Treasury decision addresses the

issues relating to enterprise zone facility

bonds. Later guidance will be published

relating to sections 141, 145, 148, and

150. After consideration of all the

comments, the proposed regulations

under section 1394 (relating to

enterprise zone facility bonds) are

adopted as revised by this Treasury

decision. The principal revisions to the

proposed regulations under section

1394 are discussed below.

Explanation of Provisions

Section 1394 applies to bonds issued

to provide enterprise zone facilities in

both empowerment zones and

enterprise communities (zones).

A. Period of Compliance

The proposed regulations in general

require compliance with the

requirements applicable to enterprise

zone facility bonds throughout the term

of the enterprise zone facility bonds.

The proposed regulations provide two

exceptions to this general rule: (i) A

business that is first established in

connection with the issuance of

enterprise zone facility bonds does not

need to meet the requirements of an

enterprise zone business and enterprise

zone property until the ‘‘testing date,’’

which is the later of one year after the

issue date or one year after the date on

which the financed property is placed

in service, and (ii) the issuer and

principal user of the facility are

permitted a one-year period to cure

noncompliance.

The final regulations modify the

general rule to require compliance with

the requirements applicable to

enterprise zone facility bonds

throughout the greater of (i) the

remainder of the period during which

the zone designation is in effect under

section 1391 (zone designation period),

and (ii) the period that ends on the

weighted average maturity date of the

enterprise zone facility bonds. The final

regulations also provide that, in general,

compliance with the requirements

applicable to enterprise zone facility

bonds is not required after the date on

which the last of the enterprise zone

facility bonds of the issue cease to be

outstanding.

1. Start of Compliance Period

Commentators requested that the

testing date provisions be extended to

all businesses, not just start-up

businesses. Commentators also

suggested lengthening the start-up

period. The final regulations follow the

recommendation to expand the testing

date provisions to all issuers and

principal users of property financed

with enterprise zone facility bonds if the

issuer and the principal user reasonably

expect that the requirements will be met

by the testing date and proceed with

due diligence to comply with the

requirements. The start-up period is

increased to the later of 18 months after

the issue date or 18 months after the

date on which the financed property is

placed in service.

2. Compliance Period for Certain

Requirements

Commentators suggested that

compliance with the requirements for

an enterprise zone business should be

based only on reasonable expectations

on the issue date. Commentators

suggested that, alternatively, the

required compliance period should be

reduced to either (i) three years (similar

to the test period for qualified small

issue manufacturing bonds), or (ii) the

remainder of the zone designation

period.

Issuers and principal users should be

required to meet the requirements

applicable to enterprise zone facility

bonds for a meaningful period of time

in order to further the goals of economic

development in the zones. Therefore, for

purposes of meeting the requirements

applicable to enterprise zone facility

bonds, the final regulations in general

require issuers and principal users of

financed property to meet the

requirements throughout the greater of

(i) the remainder of the zone designation

period, and (ii) the period that ends on

the weighted average maturity date of

the enterprise zone facility bonds.

While compliance is generally not

required after the enterprise zone

facility bonds are retired, the final

regulations do require issuers and

principal users to meet the requirements

of an enterprise zone business and

enterprise zone property for a minimum

compliance period of at least three years

after the initial testing date. The final

regulations permit the issuer to identify

an alternative initial testing date. This

alternative initial testing date is a date

after the issue date of the enterprise

zone facility bonds and prior to the

initial testing date that would have been

otherwise determined under the final

regulations.

Principal users are subject to the

change in use penalty of section 1394(e)

throughout the greater of (i) the

remainder of the zone designation

period, and (ii) the period that ends on

the weighted average maturity date of

the enterprise zone facility bonds.
Federal Register / Vol. 61, No. 106 / Friday, May 31, 1996 / Rules and Regulations 27259

3. Measurement of Compliance

The proposed regulations provide

guidance on meeting the enterprise zone

business definitions. Commentators

pointed out several difficulties in

meeting the tests in the proposed

regulations and in curing

noncompliance within a one-year

period. Commentators also asked for

guidance on how part-time employees

are to be treated for the 35 percent

resident employee requirement.

In general, each of the enterprise zone

business requirements applies over

taxable year periods. The beginning and

end of the period of required

compliance, however, may not

correspond to the beginning and ending

dates of the principal user’s taxable

year. The proposed regulations do not

address the treatment of a taxable year

only a part of which falls in a required

compliance period. The final

regulations provide that a taxable year is

disregarded if the part of the year that

falls in a required compliance period

does not exceed 90 days.

Although the final regulations

generally require annual compliance for

the requirements under sections 1397B

and 1397C, the final regulations allow a

five-year averaging, taking into account

only immediately preceding years going

back to the taxable year that includes

the initial testing date. The

requirements under sections 1397B and

1397C include requirements relating to

location of performance of employee

services, location of tangible and

intangible property, source of gross

income from the active conduct of

business, and the residence of

employees. The averaging approach

permits principal users who exceed the

requirements to provide a cushion for

future unanticipated noncompliance

(for example, a non-recurring

extraordinary payment for services

performed outside the zone).

The final regulations allow the 35

percent resident employee requirement

to be met on any reasonable basis (for

example, on a per-employee basis or on

the basis of employee actual work

hours). For purposes of the peremployee fraction, employees working

less than 15 hours a week are not

included in the numerator or the

denominator. The principal user must

consistently apply the method to

determine compliance with the 35

percent resident employee requirement

throughout the required compliance

period.

The final regulations also provide that

a zone employee who moves out of the

zone may continue to be treated as a

resident of the zone, provided that

employee was a bona fide resident of

the zone, that employee continues to

perform services for the principal user

in an enterprise zone business in the

zone and substantially all of those

services are performed in the zone, and

the principal user hires a resident of the

zone for the next available comparable

(or lesser) position.

The final regulations reduce the

‘‘substantially all’’ requirement for

purposes of various tests under sections

1397B and 1397C from 90 percent to 85

percent.

B. Qualified Zone Property Definition

The proposed regulations provide that

property that has been abandoned for

more than one year meets the original

use requirement. The final regulations

provide that if real property is vacant for

at least a one-year period including the

date of zone designation, use prior to

that period is disregarded for purposes

of determining original use.

C. Other Rules

Commentators requested guidance on

the appropriate method for treating

activities within the zone as though they

constituted a separately incorporated

business for purposes of the enterprise

zone business test.

The final regulations allow a business

to treat its activities within a zone as

part of a separately incorporated

business if it allocates income and

activities attributable to the business

within the zone using a reasonable

allocation method and has evidence of

its allocations sufficient to establish

compliance with the various

requirements.

D. Principal User

The proposed regulations do not

address the requirement that ‘‘the

principal user’’ of the enterprise zone

facility bond proceeds be an enterprise

zone business. Commentators suggested

that principal user generally be defined

in the same manner as in the regulations

applicable to qualified small issue

bonds and qualified 501(c)(3) bonds,

which relate to use of bond proceeds by

‘‘any’’ principal user, but without

applying the definition to customers.

One commentator (relying on the

definition of a qualifying business)

suggested that financing for commercial

real estate owned by a business that is

not an enterprise zone business should

be permitted, so long as 50 percent of

the gross rental income comes from

lessees that are enterprise zone

businesses.

The final regulations provide that an

owner of financed property is the

principal user except that, in the case of

commercial real estate, the lessee may

be treated as the principal user if the

rental of the property is a qualified

business under section 1397B(d)(2).

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 also has

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 to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on its

impact on small business.

Drafting Information. The principal author

of these regulations is Loretta J. Finger, Office

of Assistant Chief Counsel (Financial

Institutions and Products). However, other

personnel from the IRS and 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 is amended by adding an entry

in numerical order to read as follows:

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

Section 1.1394–1 also issued under 26

U.S.C. 1397D.

Par. 2. Sections 1.1394–0 and 1.1394–

1 are added under the undesignated

centerheading ‘‘DEFINITIONS; SPECIAL

RULES’’ to read as follows:

§ 1.1394–0 Table of contents.

This section lists the major paragraph

headings contained in § 1.1394–1.

§ 1.1394–1 Enterprise zone facility bonds.

(a) Scope.

(b) Period of compliance.

(1) In general.

(2) Compliance after an issue is retired.

(3) Deemed compliance.

(c) Special rules for requirements of sections

1397B and 1397C.

(1) Start of compliance period.

(2) Compliance period for certain prohibited

activities.

(3) Minimum compliance period.

(4) Initial testing date.
27260 Federal Register / Vol. 61, No. 106 / Friday, May 31, 1996 / Rules and Regulations

(d) Testing on an average basis.

(e) Resident employee requirements.

(1) Determination of employee status.

(2) Employee treated as zone resident.

(3) Resident employee percentage.

(f) Application to pooled financing bond and

loan recycling programs.

(g) Limitation on amount of bonds.

(1) Determination of outstanding amount.

(2) Pooled financing bond programs.

(h) Original use requirement for purposes of

qualified zone property.

(i) Land.

(j) Principal user.

(1) In general.

(2) Rental of real property.

(3) Pooled financing bond program.

(k) Treatment as separately incorporated

business.

(l) Substantially all.

(m) Application of sections 142 and 146

through 150.

(1) In general.

(2) Maturity limitation.

(3) Volume cap.

(4) Remedial actions.

(n) Continuing compliance and change of use

penalties.

(1) In general.

(2) Coordination with deemed compliance

provisions.

(3) Application to pooled financing bond and

loan recycling programs.

(4) Section 150(b)(4) inapplicable.

(o) Refunding bonds.

(1) In general.

(2) Maturity limitation.

(p) Examples.

(q) Effective dates.

(1) In general.

(2) Elective retroactive application in whole.

§ 1.1394–1 Enterprise zone facility bonds.

(a) Scope. This section contains rules

relating to tax-exempt bonds under

section 1394 (enterprise zone facility

bonds) to provide enterprise zone

facilities in both empowerment zones

and enterprise communities (zones). See

sections 1394, 1397B, and 1397C for

other rules and definitions.

(b) Period of compliance—(1) In

general. Except as provided in

paragraphs (b)(2) and (c) of this section,

the requirements under sections 1394(a)

and (b) applicable to enterprise zone

facility bonds must be complied with

throughout the greater of the

following—

(i) The remainder of the period during

which the zone designation is in effect

under section 1391 (zone designation

period); and

(ii) The period that ends on the

weighted average maturity date of the

enterprise zone facility bonds.

(2) Compliance after an issue is

retired. Except as provided in paragraph

(c)(3) of this section, the requirements

applicable to enterprise zone facility

bonds do not apply to an issue after the

date on which no enterprise zone

facility bonds of the issue are

outstanding.

(3) Deemed compliance—(i) General

rule. An issue is deemed to comply with

the requirements of sections 1394(a) and

(b) if—

(A) The issuer and the principal user

in good faith attempt to meet the

requirements of sections 1394(a) and (b)

throughout the period of compliance

required under this section; and

(B) Any failure to meet these

requirements is corrected within a oneyear period after the failure is first

discovered.

(ii) Exception. The provisions of

paragraph (b)(3)(i) of this section do not

apply to the requirements of section

1397B(d)(5)(A) (relating to certain

prohibited business activities).

(iii) Good faith. In order to satisfy the

good faith requirement of paragraph

(b)(3)(i)(A) of this section, the principal

user must at least annually demonstrate

to the issuer the principal user’s

monitoring of compliance with the

requirements of sections 1394(a) and (b).

(c) Special rules for requirements of

sections 1397B and 1397C—(1) Start of

compliance period. Except as provided

in paragraph (c)(2) of this section, the

requirements of sections 1397B (relating

to qualification as an enterprise zone

business) and 1397C (relating to

satisfaction of the rules for qualified

zone property) do not apply prior to the

initial testing date (as defined in

paragraph (c)(4) of this section) if—

(i) The issuer and the principal user

reasonably expect on the issue date of

the enterprise zone facility bonds that

those requirements will be met by the

principal user on or before the initial

testing date; and

(ii) The issuer and the principal user

exercise due diligence to meet those

requirements prior to the initial testing

date.

(2) Compliance period for certain

prohibited activities. The requirements

of section 1397B(d)(5)(A) (relating to

certain prohibited business activities)

must be complied with throughout the

term of the enterprise zone facility

bonds.

(3) Minimum compliance period. The

requirements of sections 1397B(b) or (c)

and 1397C must be satisfied for a

continuous period of at least three years

after the initial testing date,

notwithstanding that—

(i) The period of compliance required

under paragraph (b)(1) of this section

expires before the end of the three-year

period; or

(ii) The enterprise zone facility bonds

are retired before the end of the threeyear period.

(4) Initial testing date—(i) In general.

Except as otherwise provided in

paragraph (c)(4)(ii) of this section, the

initial testing date is the date that is 18

months after the later of the issue date

of the enterprise zone facility bonds or

the date on which the financed property

is placed in service; provided, however,

it is not later than—

(A) Three years after the issue date; or

(B) Five years after the issue date, if

the issue finances a construction project

for which both the issuer and a licensed

architect or engineer certify on or before

the issue date of the enterprise zone

facility bonds that more than three years

after the issue date is necessary to

complete construction of the project.

(ii) Alternative initial testing date. If

the issuer identifies as the initial testing

date a date after the issue date of the

enterprise zone facility bonds and prior

to the initial testing date that would

have been determined under paragraph

(c)(4)(i) of this section, that earlier date

is treated as the initial testing date.

(d) Testing on an average basis.

Compliance with each of the

requirements of section 1397B(b) or (c)

is tested each taxable year. Compliance

with any of the requirements may be

tested on an average basis, taking into

account up to four immediately

preceding taxable years plus the current

taxable year. The earliest taxable year

that may be taken into account for

purposes of the preceding sentence is

the taxable year that includes the initial

testing date. A taxable year is

disregarded if the part of the taxable

year that falls in a required compliance

period does not exceed 90 days.

(e) Resident employee requirements—

(1) Determination of employee status.

For purposes of the requirement of

section 1397B(b)(6) or (c)(5) that at least

35 percent of the employees are

residents of the zone, the issuer and the

principal user may rely on a

certification, signed under penalties of

perjury by the employee, provided—

(i) The certification provides to the

principal user the address of the

employee’s principal residence;

(ii) The employee is required by the

certification to notify the principal user

of a change of the employee’s principal

residence; and

(iii) Neither the issuer nor the

principal user has actual knowledge that

the principal residence set forth in the

certification is not the employee’s

principal residence.

(2) Employee treated as zone resident.

If an issue fails to comply with the

requirement of section 1397B(b)(6) or

(c)(5) because an employee who initially

resided in the zone moves out of the
Federal Register / Vol. 61, No. 106 / Friday, May 31, 1996 / Rules and Regulations 27261

zone, that employee is treated as still

residing in the zone if—

(i) That employee was a bona fide

resident of the zone at the time of the

certification described in paragraph

(e)(1) of this section;

(ii) That employee continues to

perform services for the principal user

in an enterprise zone business and

substantially all of those services are

performed in the zone; and

(iii) A resident of the zone meeting

the requirements of section 1397B(b)(5)

or (c)(4) is hired by the principal user

for the next available comparable (or

lesser) position.

(3) Resident employee percentage. For

purposes of meeting the requirement of

section 1397B(b)(6) or (c)(5) that at least

35 percent of the employees of an

enterprise zone business are residents of

a zone, paragraphs (e)(3)(i) and (ii) of

this section apply.

(i) The term employee includes a selfemployed individual within the

meaning of section 401(c)(1).

(ii) The resident employee percentage

is determined on any reasonable basis

consistently applied throughout the

period of compliance required under

this section. The per-employee fraction

(as defined in paragraph (e)(3)(ii)(A) of

this section) or the employee actual

work hour fraction (as defined in

paragraph (e)(3)(ii)(B) of this section) are

both reasonable methods.

(A) The term per-employee fraction

means the fraction, the numerator of

which is, during the taxable year, the

number of employees who work at least

15 hours a week for the principal user,

who reside in the zone, and who are

employed for at least 90 days, and the

denominator of which is, during the

same taxable year, the aggregate number

of all employees who work at least 15

hours a week for the principal user and

who are employed for at least 90 days.

(B) The term employee actual work

hour fraction means the fraction, the

numerator of which is the aggregate

total actual hours of work for the

principal user of employees who reside

in the zone during a taxable year, and

the denominator of which is the

aggregate total actual hours of work for

the principal user of all employees

during the same taxable year.

(f) Application to pooled financing

bond and loan recycling programs. In

the case of a pooled financing bond

program described in paragraph (g)(2) of

this section or a loan recycling program

described in paragraph (m)(2)(ii) of this

section, the requirements of paragraphs

(b) through (e) of this section apply on

a loan-by-loan basis. See also

paragraphs (g)(2) (relating to limitation

on amount of bonds), (m)(2) (relating to

maturity limitations), (m)(3) (relating to

volume cap), and (m)(4) (relating to

remedial actions) of this section.

(g) Limitation on amount of bonds—

(1) Determination of outstanding

amount. Whether an issue satisfies the

requirements of section 1394(c) (relating

to the $3 million and $20 million

aggregate limitations on the amount of

outstanding enterprise zone facility

bonds) is determined as of the issue date

of that issue, based on the issue price of

that issue and the adjusted issue price

of outstanding enterprise zone facility

bonds. Amounts of outstanding

enterprise zone facility bonds allocable

to any entity are determined under rules

contained in section 144(a)(10)(C) and

the underlying regulations. Thus, the

definition of principal user for purposes

of section 1394(c) is different from the

definition of principal user for purposes

of paragraph (j) of this section.

(2) Pooled financing bond programs—

(i) In general. The limitations of section

1394(c) for an issue for a pooled

financing bond program are determined

with regard to the amount of the actual

loans to enterprise zone businesses

rather than the amount lent to

intermediary lenders as defined in

paragraph (g)(2)(ii) of this section. This

paragraph (g)(2) applies only to the

extent the proceeds of those enterprise

zone facility bonds are loaned to one or

more enterprise zone businesses within

42 months of the issue date of the

enterprise zone facility bonds or are

used to redeem enterprise zone facility

bonds of the issue within that 42-month

period.

(ii) Pooled financing bond program

defined. For purposes of this section, a

pooled financing bond program is a

program in which the issuer of

enterprise zone facility bonds, in order

to provide loans to enterprise zone

businesses, lends the proceeds of the

enterprise zone facility bonds to a bank

or similar intermediary (intermediary

lender) which must then relend the

proceeds to two or more enterprise zone

businesses.

(h) Original use requirement for

purposes of qualified zone property. In

general, for purposes of section

1397C(a)(1)(B), the term original use

means the first use to which the

property is put within the zone. For

purposes of section 1394, if property is

vacant for at least a one-year period

including the date of zone designation,

use prior to that period is disregarded

for purposes of determining original

use. For this purpose, de minimis

incidental uses of property, such as

renting the side of a building for a

billboard, are disregarded.

(i) Land. The determination of

whether land is functionally related and

subordinate to qualified zone property

is made in a manner consistent with the

rules for exempt facilities under section

142.

(j) Principal user—(1) In general.

Except as provided in paragraph (j)(2) of

this section, the term principal user

means the owner of financed property.

(2) Rental of real property—(i) A

lessee as the principal user. If an owner

of real property financed with enterprise

zone facility bonds is not an enterprise

zone business within the meaning of

section 1397B, but the rental of the

property is a qualified business within

the meaning of section 1397B(d)(2), the

term principal user for purposes of

sections 1394(b) and (e) means the

lessee or lessees.

(ii) Allocation of enterprise zone

facility bonds. If a lessee is the principal

user of real property under paragraph

(j)(2)(i) of this section, then proceeds of

enterprise zone facility bonds may be

allocated to expenditures for real

property only to the extent of the

property allocable to the lessee’s leased

space, including expenditures for

common areas.

(3) Pooled financing bond program.

An intermediary lender in a pooled

financing bond program described in

paragraph (g)(2) of this section is not

treated as the principal user.

(k) Treatment as separately

incorporated business. For purposes of

section 1394(b)(3)(B), a trade or business

may be treated as separately

incorporated if allocations of income

and activities attributable to the

business conducted within the zone are

made using a reasonable allocation

method and if that trade or business has

evidence of those allocations sufficient

to establish compliance with the

requirements of paragraphs (b) through

(f) of this section. Whether an allocation

method is reasonable will depend upon

the facts and circumstances. An

allocation method will not be

considered to be reasonable unless the

allocation method is applied

consistently by the trade or business

and is consistent with the purposes of

section 1394.

(l) Substantially all. For purposes of

sections 1397B and 1397C(a), the term

substantially all means 85 percent.

(m) Application of sections 142 and

146 through 150—(1) In general. Except

as provided in this paragraph (m),

enterprise zone facility bonds are

treated as exempt facility bonds that are

described in section 142(a), and all

regulations generally applicable to

exempt facility bonds apply to

enterprise zone facility bonds. For this
27262 Federal Register / Vol. 61, No. 106 / Friday, May 31, 1996 / Rules and Regulations

purpose, enterprise zone businesses are

treated as meeting the public use

requirement. Sections 147(c)(1)(A)

(relating to limitations on financing the

acquisition of land), 147(d) (relating to

financing the acquisition of existing

property), and 142(b)(2) (relating to

limitations on financing office space) do

not apply to enterprise zone facility

bonds. See also paragraph (n)(4) of this

section.

(2) Maturity limitation—(i)

Requirements. An issue of enterprise

zone facility bonds, the proceeds of

which are to be used as part of a loan

recycling program, satisfies the

requirements of section 147(b) if—

(A) Each loan satisfies the

requirements of section 147(b)

(determined by treating each separate

loan as a separate issue); and

(B) The term of the issue does not

exceed 30 years.

(ii) Loan recycling program defined. A

loan recycling program is a program in

which—

(A) The issuer reasonably expects as

of the issue date of the enterprise zone

facility bonds that loan repayments from

principal users will be used to make

additional loans during the zone

designation period;

(B) Repayments of principal on loans

(including prepayments) received

during the zone designation period are

used within six months of the date of

receipt either to make new loans to

enterprise zone businesses or to redeem

enterprise zone facility bonds that are

part of the issue; and

(C) Repayments of principal on loans

(including prepayments) received after

the zone designation period are used to

redeem enterprise zone facility bonds

that are part of the issue within six

months of the date of receipt.

(3) Volume cap. For purposes of

applying section 146(f)(5)(A) (relating to

elective carryforward of unused volume

limitation), issuing enterprise zone

facility bonds is a carryforward purpose.

(4) Remedial actions. In the case of a

pooled financing bond program

described in paragraph (g)(2) of this

section or a loan recycling program

described in paragraph (m)(2)(ii) of this

section, if a loan fails to meet the

requirements of paragraphs (b) through

(f) of this section, within six months of

noncompliance (after taking into

account the deemed compliance

provisions of paragraph (b)(3) of this

section, if applicable), an amount equal

to the outstanding loan principal must

be prepaid and the issuer must—

(i) Reloan the amount of the

prepayment; or

(ii) Use the prepayment to redeem an

amount of outstanding enterprise zone

facility bonds equal to the outstanding

principal amount of the loan that no

longer meets those requirements.

(n) Continuing compliance and

change of use penalties—(1) In general.

The penalty provisions of section

1394(e) apply throughout the period of

compliance required under paragraph

(b)(1) of this section.

(2) Coordination with deemed

compliance provisions. Section

1394(e)(2) does not apply during any

period during which the issue is

deemed to comply with the

requirements of section 1394 under the

deemed compliance provisions of

paragraph (b)(3) of this section.

(3) Application to pooled financing

bond and loan recycling programs. In

the case of a pooled financing bond

program described in paragraph (g)(2) of

this section or a loan recycling program

described in paragraph (m)(2)(ii) of this

section, section 1394(e) applies on a

loan-by-loan basis.

(4) Section 150(b)(4) inapplicable.

Section 150(b)(4) does not apply to

enterprise zone facility bonds.

(o) Refunding bonds—(1) In general.

An issue of bonds issued after the zone

designation period to refund enterprise

zone facility bonds (other than in an

advance refunding) are treated as

enterprise zone facility bonds if the

refunding issue and the prior issue, if

treated as a single combined issue,

would meet all of the requirements for

enterprise zone facility bonds, except

the requirements in section 1394(c). For

example, the compliance period

described in paragraph (b)(1) of this

section is calculated taking into account

any extension of the weighted average

maturity of the refunding issue

compared to the remaining weighted

average maturity of the prior issue. The

proceeds of the refunding issue are

allocated to the same expenditures and

purpose investments as the prior issue.

(2) Maturity limitation. The maturity

limitation of section 147(b) is applied to

a refunding issue by taking into account

the issuer’s reasonable expectations

about the economic life of the financed

property as of the issue date of the prior

issue and the actual weighted average

maturity of the combined refunding

issue and prior issue.

(p) Examples. The following examples

illustrate paragraphs (a) through (o) of

this section:

Example 1. Averaging of enterprise zone

business requirements. City C issues

enterprise zone facility bonds, the proceeds

of which are loaned by C to Corporation B

to finance the acquisition of equipment for its

existing business located in a zone. On the

issue date of the enterprise zone facility

bonds, B meets all of the requirements of

section 1397B(b), except that only 25% of B’s

employees reside in the zone. C and B

reasonably expect on the issue date to meet

all requirements of section 1397B(b) by the

date that is 18 months after the equipment is

placed in service (the initial testing date). In

each of the first, second, and third taxable

years after the initial testing date, 35%, 40%

and 45%, respectively, of B’s employees are

zone residents. In the fourth year after the

testing date, only 25% of B’s employees are

zone residents. B continues to meet the 35%

resident employee requirement, because the

average of zone resident employees for those

four taxable years is approximately 36%. The

percentage of zone residents employed by B

before the initial testing date is not included

in determining whether B continues to

comply with the 35% resident employee

requirement.

Example 2. Measurement of resident

employee percentage. Authority D issues

enterprise zone facility bonds, the proceeds

of which are loaned to Sole Proprietor F to

establish an accounting business in a zone.

In the first year after the initial testing date,

the staff working for F includes F, who works

40 hours per week and does not live in the

zone, one employee who resides in the zone

and works 40 hours per week, one employee

who does not reside in the zone and works

20 hours per week, and one employee who

does not reside in the zone and works 10

hours per week. F meets the 35% resident

employee test by calculating the percentage

on the basis of employee actual work hours

as described in paragraph (e)(3)(ii)(B) of this

section. If F uses the per-employee basis as

described in paragraph (e)(3)(ii)(A) of this

section to determine if the resident employee

test is met, the percentage of employees who

are zone residents on a per-employee basis is

only 33% because F must exclude from the

numerator and the denominator the

employee who works only 10 hours per

week. If F calculates the resident employee

test as a percentage of employee actual work

hours as described in paragraph (e)(3)(ii)(B)

of this section in the first year, F must

calculate the resident employee test as a

percentage of employee actual work hours

each year.

Example 3. Active conduct of business

within the zone. State G issues enterprise

zone facility bonds and loans the proceeds to

Corporation H to finance the acquisition of

equipment for H’s mail order clothing

business, which is located in a zone. H

purchases the supplies for its clothing

business from suppliers located both within

and outside of the zone and expects that

orders will be received both from customers

who will reside or work within the zone and

from others outside the zone. All orders are

received and filled at, and are shipped from,

H’s clothing business located in the zone. H

meets the requirement that at least 80% of its

gross income is derived from the active

conduct of business within the zone.

Example 4. Enterprise zone business

definition. City J issues enterprise zone

facility bonds, the proceeds of which are

loaned to Partnership K to finance the

acquisition of equipment for its printing

operation located in the zone. All orders are

taken and completed, and all billing and
Federal Register / Vol. 61, No. 106 / Friday, May 31, 1996 / Rules and Regulations 27263

accounting activities are performed, at the

print shop located in the zone. K, on

occasion, uses its equipment (including its

trucks) and employees to deliver large print

jobs to customers who reside outside of the

zone. So long as K is able to establish that

its trucks are used in the zone at least 85%

of the time and its employees perform at least

85% of services for K in the zone, K meets

the requirements of sections 1397B(b)(3) and

(5).

Example 5. Treatment as a separately

incorporated business. The facts are the same

as in Example 4 except that six years after the

issue date of the enterprise zone facility

bonds, K determines to expand its operations

to a second location outside of the

boundaries of the zone. Although the

expansion would result in the failure of K to

meet the tests of 1397B(b), K, using a

reasonable allocation method, allocates

income and activities to its operations within

the zone and has evidence of these

allocations sufficient to establish compliance

with the requirements of paragraphs (b)

through (f) of this section. The bonds will not

fail to be enterprise zone facility bonds

merely because of the expansion.

Example 6. Treatment of pooled financing

bond programs. Authority L issues bonds in

the aggregate principal amount of $5,000,000

and loans the proceeds to Bank M pursuant

to a loans-to-lenders program. M does not

meet the definition of enterprise zone

business contained in section 1397B. Prior to

the issue date of the bonds, L held a public

hearing regarding issuance of the bonds for

the loans-to-lenders program, describing the

projects of identified borrowers to be

financed initially with $4,000,000 of the

proceeds of the bonds. The applicable elected

representative of L approved issuance of the

bonds subsequent to the public hearing. The

loan agreement between L and M provides

that the other proceeds of the bonds will be

held by M and loaned to borrowers that

qualify as enterprise zone businesses,

following a public hearing and approval by

the applicable elected representative of L of

each loan by M to an enterprise zone

business. None of the loans will be in

principal amounts in excess of $3,000,000.

The loans by M will otherwise meet the

requirements of section 1394. The bonds will

be enterprise zone facility bonds.

Example 7. Original use requirement for

purposes of qualified zone property. City N

issues enterprise zone facility bonds, the

proceeds of which are loaned to Corporation

P to finance the acquisition of equipment. P

uses the proceeds after the zone designation

date to purchase used equipment located

outside of the zone and places the equipment

in service at its location in the zone.

Substantially all of the use of the equipment

is in the zone and is in the active conduct

of a qualified business by P. The equipment

is treated as qualified enterprise zone

property under section 1397C because P

makes the first use of the property within the

zone after the zone designation date.

Example 8. Principal user. State R issues

enterprise zone facility bonds and loans the

proceeds to Partnership S to finance the

construction of a small shopping center to be

located in a zone. S is in the business of

commercial real estate. S is not an enterprise

zone business, but has secured one anchor

lessee, Corporation T, for the shopping

center. T would qualify as an enterprise zone

business. S will derive 60% of its gross rental

income of the shopping center from T. S does

not anticipate that the remaining rental

income will come from enterprise zone

businesses. T will occupy 60% of the total

rentable space in the shopping center. S can

use enterprise zone facility bond proceeds to

finance the portion of the costs of the

shopping center allocable to T (60%) because

T is treated as the principal user of the

enterprise zone facility bond proceeds.

Example 9. Remedial actions. State W

issues pooled financing enterprise zone

facility bonds, the proceeds of which will be

loaned to several enterprise zone businesses

in the two enterprise communities and one

empowerment zone in W. Proceeds of the

pooled financing bonds are loaned to

Corporation X, an enterprise zone business,

for a term of 10 years. Six years after the date

of the loan, X expands its operations beyond

the empowerment zone and is no longer able

to meet the requirements of section 1394. X

does not reasonably expect to be able to cure

the noncompliance. The loan documents

provide that X must prepay its loan in the

event of noncompliance. W does not expect

to be able to reloan the prepayment by X

within six months of noncompliance. X’s

noncompliance will not affect the

qualification of the pooled financing bonds

as enterprise zone facility bonds if W uses

the proceeds from the loan prepayment to

redeem outstanding enterprise zone facility

bonds within six months of noncompliance

in an amount comparable to the outstanding

amount of the loan immediately prior to

prepayment. X will be denied an interest

expense deduction for the interest accruing

from the first day of the taxable year in which

the noncompliance began.

(q) Effective dates—(1) In general.

Except as otherwise provided in this

section, the provisions of this section

apply to all issues issued after July 30,

1996, and subject to section 1394.

(2) Elective retroactive application in

whole. An issuer may apply the

provisions of this section in whole, but

not in part, to any issue that is

outstanding on July 30, 1996, and is

subject to section 1394.

Approved: May 22, 1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96–13718 Filed 5–30–96; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 203

RIN 1010–AC13

Royalty Relief for Producing Leases

and Certain Existing Leases in Deep

Water

AGENCY: Minerals Management Service

(MMS), Interior.

ACTION: Interim Rule and Information

Gathering.

SUMMARY: This interim rule establishes

conditions for granting royalty relief on

producing leases through their

conversion to Net Revenue Share (NRS)

leases, provides for suspensions of

royalty payments on certain deep-water

leases issued as the result of a lease sale

held before November 28, 1995, and

defines the information required for a

complete application for royalty relief.

DATES: This interim rule is effective July

1, 1996.

We will consider all comments we

receive by July 30, 1996. We will begin

review of comments at that time and

may not fully consider comments we

receive after July 30, 1996.

ADDRESSES: Mail or hand-carry

comments to the Department of the

Interior; Minerals Management Service;

Mail Stop 4700; 381 Elden Street;

Herndon, Virginia 22070–4817;

Attention: Chief, Engineering and

Standards Branch.

FOR FURTHER INFORMATION CONTACT: Dr.

Marshall Rose, Economic Evaluation

Branch, telephone (703) 787–1536.

SUPPLEMENTARY INFORMATION:

I. Objectives of Royalty Relief

Royalty relief can lead to increased

production of natural gas and oil,

creating profits for lessees and royalty

and tax revenues for the government. By

this rulemaking, the Secretary seeks to

establish economic incentives to

encourage Outer Continental Shelf

(OCS) lessees to incur the expenses or

make the capital investments necessary

to maintain or increase production. To

the extent possible for approved

applications, we will reduce or suspend

royalty payments to permit lessees to

earn a reasonable return on their capital

investment for projects involving new

investment. For projects not involving

new investment, we will provide relief

sufficient to allow an operating profit in

cases where expenses plus royalties

exceed revenues.

The Secretary will implement these

royalty relief provisions in conjunction