Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Proposed Rules 33405

Thus, for 2002 and future years to which the

election applies, C may amortize only

$23,190.88 ($30,000–$3,257.44–$3,551.68).

(d) Revocation of election. The

election under this section may not be

revoked unless approved by the

Commissioner.

Par. 6. Section 1.171–5 is added to

read as follows:

§ 1.171–5 Effective date and transition

rules.

(a) Effective date—(1) In general. This

section and §§ 1.171–1 through 1.171–4

apply to bonds acquired on or after the

date 60 days after the date final

regulations are published in the Federal

Register. However, if a holder makes the

election under § 1.171–4 for the taxable

year containing the date 60 days after

the date final regulations are published

in the Federal Register, this section and

§§ 1.171–1 through 1.171–4 apply to

bonds held on or after the first day of

that taxable year.

(2) Transition rule for use of constant

yield. Notwithstanding paragraph (a)(1)

of this section, § 1.171–2(a)(3)

(providing that the bond premium

allocable to an accrual period is

determined with reference to a constant

yield) does not apply to a bond issued

before September 28, 1985.

(b) Coordination with existing

election. A holder is deemed to have

made the election under § 1.171–4 if the

holder elected to amortize bond

premium under section 171 and that

election is effective on the date 60 days

after the date final regulations are

published in the Federal Register.

(c) Accounting method changes—(1)

Consent to change. A holder required to

change its method of accounting for

bond premium to comply with

§§ 1.171–1 through 1.171–3 must secure

the consent of the Commissioner in

accordance with the requirements of

§ 1.446–1(e). Paragraph (c)(2) of this

section provides the Commissioner’s

automatic consent for certain changes. A

holder making the election does not

need the Commissioner’s consent.

(2) Automatic consent. The

Commissioner grants consent for a

holder to change its method of

accounting for bond premium with

respect to bonds to which §§ 1.171–1

through 1.171–3 apply. The consent

granted by this paragraph (c)(2) applies

provided—

(i) The holder elected to amortize

bond premium under section 171 for a

taxable year prior to the taxable year

containing the date 60 days after the

date final regulations are published in

the Federal Register and that election

has not been revoked;

(ii) The change is made for the first

taxable year for which the holder must

account for a bond under §§ 1.171–1

through 1.171–3; and

(iii) The holder attaches to its return

for the taxable year containing the

change a statement that it has changed

its method of accounting under this

section.

Par. 7. Section 1.1016–5 is amended

by revising paragraph (b) to read as

follows:

§ 1.1016–5 Miscellaneous adjustments to

basis.

* * * * *

(b) Amortizable bond premium. A

holder’s basis in a bond is reduced by

the amount of bond premium used to

offset qualified stated interest income

under § 1.171–2. This reduction occurs

when the holder takes the qualified

stated interest into account under the

holder’s regular method of accounting.

In addition, a holder’s basis in a taxable

bond is reduced by the amount of bond

premium allowed as a deduction under

§ 1.171–3(b)(5)(ii) (relating to the

issuer’s call of a taxable bond).

* * * * *

§ 1.1016–9 [Removed]

Par. 8. Section 1.1016–9 is removed.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96–16350 Filed 6–26–96; 8:45 am]

BILLING CODE 4830–01–P

26 CFR Part 1

[FI–28–96]

RIN 1545–AU39

Arbitrage Restrictions on Tax-Exempt

Bonds

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations on the arbitrage

restrictions applicable to tax-exempt

bonds issued by state and local

governments. Changes to applicable law

were made by the Tax Reform Act of

1986. These proposed regulations affect

issuers of tax-exempt bonds and would

provide guidance for complying with

the arbitrage regulations.

DATES: Written comments must be

received by September 25, 1996.

Requests to speak (with outlines of oral

comments) at a public hearing

scheduled for Thursday, October 24,

1996, at 10 a.m. must be received by

October 3, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (FI–28–96), room

5226, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative,

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:R (FI–28–96),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC. The public hearing

will be held in the Commissioner’s

Conference Room, Internal Revenue

Building, 1111 Constitution Avenue,

NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations,

Loretta J. Finger, (202) 622–3980;

concerning submissions and the

hearing, Michael Slaughter, (202) 622–

7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information

contained in this notice of proposed

rulemaking have been submitted to the

Office of Management and Budget for

review in accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507).

Comments on the collections of

information should be sent to the Office

of Management and Budget, Attn: Desk

Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503, with copies to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, T:FP, Washington, DC

20224. Comments on the collections of

information should be received by

August 26, 1996.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The collections of information are in

proposed § 1.148–5(d)(6) (v), (vi), and

(vii). This information is required by the

IRS to verify compliance with section

148. This information will be used to

establish a rebuttable presumption that

a Treasury obligation is purchased at

fair market value. The likely

respondents and/or recordkeepers are

state or local governments. Responses to

this collection of information are

required to establish a rebuttable

presumption that a Treasury obligation

is purchased at fair market value.

Books or 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
33406 Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Proposed Rules

are confidential, as required by 25

U.S.C. 6103.

Estimated total annual reporting and

recordkeeping burden: 2,400 hours.

The estimated annual burden per

respondent/recordkeeper varies from 2

hours to 30 hours, depending on

individual circumstances, with an

estimated average of 6 hours.

Estimated number of respondents/

recordkeepers: 400.

Estimated annual frequency of

responses: on occasion.

Background

This document contains proposed

regulations amending the Income Tax

Regulations (26 CFR part 1) under

section 148 of the Internal Revenue

Code to provide guidance on

nonpurpose investments for purposes of

arbitrage yield restrictions under section

148.

Explanation of Provisions

A. Background of Proposed Regulations

Section 148 provides rules concerning

the use of proceeds of state and local

bonds to acquire higher yielding

investments. Section 148(a) provides

that, except as otherwise permitted by

section 148, interest on a state or local

bond generally is tax-exempt only if the

issuer invests bond proceeds at a yield

not exceeding the bond yield. Section

148(f) provides, in general, that interest

on a state or local bond is tax-exempt

only if the issuer rebates to the United

States certain earnings from investing

bond proceeds at a yield exceeding the

bond yield.

Section 1.148–6(c) provides that gross

proceeds of an issue of bonds are not

allocated to a payment for a nonpurpose

investment in an amount greater than

the fair market value of that investment

on the purchase date. For this purpose

only, the fair market value of a

nonpurpose investment is adjusted to

take into account qualified

administrative costs allocable to that

investment.

Regulations relating to the arbitrage

yield restriction rules are in §§ 1.148–0

through 1.148–11 and in §§ 1.148–1T,

1.148–2T, 1.148–3T, 1.148–4T, 1.148–

5T, 1.148–6T, 1.148–9T, 1.148–10T, and

1.148–11T. The proposed regulations

would clarify and revise certain

provisions of these regulations.

B. Bona Fide Solicitation

Section 1.148–5(d)(6)(iii) provides

that the purchase price of a guaranteed

investment contract is treated as its fair

market value on the purchase date if the

issuer makes a bona fide solicitation for

a guaranteed investment contract that

meets the requirements of that section.

The proposed regulations would clarify

that a solicitation for a guaranteed

investment contract is rebuttably

presumed to be bona fide if the

following requirements are met: (i) If the

issuer uses an agent to conduct the

bidding process, the agent does not bid

to provide the investment; (ii) all

bidders have equal opportunity to bid so

that, for example, no bidder is given the

opportunity to review other bids (a last

look) before bidding; and (iii) all bidders

are reasonably competitive providers of

investments of the type purchased.

C. Rebuttable Presumption for

Establishing Fair Market Value

Section 1.148–5(d)(6)(iii) provides a

safe harbor for establishing fair market

value for guaranteed investment

contracts. The definition of guaranteed

investment contract generally does not

include the purchase of investments for

an escrow for an advance refunding

transaction.

The proposed regulations would

provide a rebuttable presumption for

establishing fair market value for United

States Treasury obligations purchased

other than directly from the United

States Treasury. The proposed

regulations would apply the principles

underlying the safe harbor in the

regulations for establishing fair market

value for guaranteed investment

contracts.

D. Qualified Administrative Costs

Section 1.148–5(e)(2)(i) provides in

general that, in determining payments

and receipts on nonpurpose

investments, qualified administrative

costs are taken into account. Thus,

qualified administrative costs increase

the payments for, or decrease the

receipts from, the investments.

The proposed regulations would

provide a special rule to determine

qualified administrative costs for United

States Treasury obligations purchased

other than directly from the United

States Treasury.

Proposed Effective Dates

The regulations are proposed to apply

to bonds sold on or after the date 60

days after the adoption of final

regulations. In addition, these

regulations are proposed to apply after

that date to permit an issuer to apply

these regulations to bonds to which

certain other regulations under section

148 apply that were sold prior to that

date.

Special Analyses

It has been determined that this notice

of proposed rulemaking 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, 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 business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (a signed original and

eight (8) copies) that are submitted

timely to the IRS. All comments will be

available for public inspection and

copying.

A public hearing has been scheduled

for Thursday, Ocotber 24, 1996, at 10

a.m., in the Commissioner’s Conference

Room, Internal Revenue Building, 1111

Constitution Avenue, NW., Washington,

DC. Because of access restrictions,

visitors will not be admitted beyond the

Internal Revenue Building lobby more

than 15 minutes before the hearing

starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments by September 25,

1996 and submit an outline of the topics

to be discussed and the time to be

devoted to each topic (signed original

and eight (8) copies) by October 3, 1996.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

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.
Federal Register / Vol. 61, No. 125 / Thursday, June 27, 1996 / Proposed Rules 33407

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read as follows:

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

Par. 2. Section 1.148–5 is amended by

adding paragraphs (d)(6)(iv) through

(d)(6)(viii) and (e)(2)(iv) to read as

follows:

§ 1.148–5 Yield and valuation of

investments.

* * * * *

(d) * * *

(6) * * *

(iv) Rebuttable presumption for

establishing that a solicitation for a

guaranteed investment contract is bona

fide. For purposes of paragraph

(d)(6)(iii)(A) of this section, a

solicitation for a guaranteed investment

contract is rebuttably presumed to be

bona fide if the other requirements of

paragraph (d)(6)(iii) of this section and

the following requirements are satisfied:

(A) If the issuer uses an agent to

conduct the bidding process, the agent

does not bid to provide the investment;

(B) All bidders have equal

opportunity to bid so that, for example,

no bidder is given the opportunity to

review other bids (a last look) before

bidding; and

(C) All bidders are reasonably

competitive providers of investments of

the type purchased.

(v) Rebuttable presumption for

establishing fair market value for United

States Treasury obligations purchased

other than directly from the United

States Treasury. The purchase price of

United States Treasury obligations that

are purchased other than directly from

the United States Treasury is rebuttably

presumed to be the fair market value on

the purchase date if all of the following

requirements are satisfied:

(A) The issuer conducts in good faith

a solicitation for the purchase of

Treasury obligations that meets the

requirements of paragraphs (d)(6)(iv)(A)

through (C) of this section, and the

issuer receives at least three bona fide

bids from providers that have no

material financial interest in the issue.

For this purpose, underwriters and

financial advisors for an issue are

considered to have a material financial

interest in the issue.

(B) The issuer purchases the highestyielding Treasury obligations for which

a qualifying bid is made.

(C) The yield on the Treasury

obligations purchased is not

significantly less than the yield then

available from the provider on

reasonably comparable Treasury

obligations offered to other persons for

purchase on terms comparable to those

offered to the issuer from a source of

funds other than gross proceeds of taxexempt bonds. If closely comparable

forward prices are not offered to other

persons for purchase from a source

other than gross proceeds of tax-exempt

bonds, a reasonable basis for this

comparison may be by reference to

implied forward prices for Treasury

obligations based on standard financial

formulas. In general, a certificate

provided by an agent conducting the

bidding process detailing this

comparison establishes that this

comparability standard is met.

(D) In no event is the yield on any

Treasury obligation purchased less than

the highest yield then available on a

United States Treasury security—State

and Local Government Series from the

United States Department of the

Treasury, Bureau of Public Debt, with

the same maturity.

(E) The terms of the agreement to

purchase the Treasury obligations are

reasonable.

(F) The issuer retains the items

enumerated in paragraphs (d)(vi) and

(vii) of this section with the bond

documents.

(vi) Copies. The items described in

this paragraph (d)(vi) are a copy of each

of the following—

(A) The purchase agreement or

confirmation and a statement detailing

any oral and other terms of the

agreement;

(B) The receipt or other record of the

amount actually paid by the issuer for

the Treasury obligations, including a

statement setting out the amount of any

brokerage commission, broker fee, or

bidding fee paid to or by the seller of the

Treasury obligations; and

(C) Each bid that is received with

respect to the solicitation of the

Treasury obligations (clearly stamped to

show date and time when the bid was

received) and a description of the

bidding procedure used.

(vii) Statement. The item described in

this paragraph (d)(vii) is a statement

from the issuer, dated as of the issue

date of the bonds, certifying, under

penalties of perjury, that—

(A) If the issuer used an agent to

conduct the bidding process, the agent

did not bid to provide the investment;

(B) All bidders had equal opportunity

to bid so that, for example, no bidder

had an opportunity to review other bids

before bidding;

(C) All bidders are reasonably

competitive sellers of Treasury

obligations; and

(D) The issuer received at least three

bona fide bids from providers that have

no material financial interest in the

issue.

(viii) For purposes of paragraphs

(d)(6) (v) through (vii) of this section,

the term issuer means only the entity

that actually issues the bonds and not a

conduit borrower of the issuer.

(e) * * *

(2) * * *

(iv) Special rule for United States

Treasury obligations purchased other

than directly from the United States

Treasury. For Treasury obligations

purchased other than directly from the

United States Treasury, a fee paid to a

bidding agent is a qualified

administrative cost only if the following

requirements are satisfied:

(A) The fee must be reasonable. In

general, a fee must be separately stated

in order for the issuer to have a basis for

determining that a fee is reasonable. The

fee is presumed to be reasonable if it

does not exceed .02 percent of the

amount invested in Treasury

obligations.

(B) The fee must be comparable to a

fee that would be charged for a

reasonably comparable investment of

Treasury obligations if acquired with a

source of funds other than gross

proceeds of tax-exempt bonds. This

comparability standard must be applied

even if no identical investments are

customarily acquired with a source of

funds other than gross proceeds of taxexempt bonds. In general, reference

must be made to the bidding fees paid

by investors that are not issuers of taxexempt bonds in those transactions that

are most closely comparable to the

purchase of investments by the issuer of

tax-exempt bonds. For example,

reference to the bidding fees generally

paid for the purchase of forward

contracts for Treasury obligations is

ordinarily a reasonable method of

determining whether bidding fees are

reasonable.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96–16378 Filed 6–26–96; 8:45 am]

BILLING CODE 4830–01–U