Source: https://www.irs.gov/irb/2018-27_IRB
Timestamp: 2019-04-21 00:33:47+00:00

Document:
This notice sets forth updates on the corporate bond monthly yield curve, the corresponding spot segment rates for June 2018 used under § 417(e)(3)(D), the 24-month average segment rates applicable for June 2018, and the 30-year Treasury rates, as reflected by the application of § 430(h)(2)(C)(iv).
Federal rates; adjusted federal rates; adjusted federal long-term rate, the long-term exempt rate, and the blended annual rate. For purposes of sections 382, 1274, 1288, 7872 and other sections of the Code, tables set forth the rates for July 2018.
The proposed regulations would amend the definition of investment-type property for purposes of tax-advantaged bonds and the arbitrage investment yield restrictions under §148 that apply to those bonds. Section 103 provides that an arbitrage bond, as defined in §148, is not tax-exempt. A bond is an arbitrage bond under §148 if the bond’s proceeds are used to purchase certain investment property with a yield higher than the yield on the issue. Investment property includes not only securities but also, among other things, “investment-type property.” Investment-type property is generally defined as any property that is held principally as a passive vehicle for the production of income. The proposed regulations would amend this definition to clarify that real or tangible personal property purchased with proceeds of tax-exempt bonds is not investment-type property if that property is used in furtherance of the public purposes for which the tax-exempt bonds are issued.
This revenue ruling provides various prescribed rates for federal income tax purposes for July 2018 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, shall not be less than 9%. Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. Finally, Table 6 contains the blended annual rate for 2018 for purposes of section 7872.
Notice 2007–81, 2007–44 I.R.B. 899, provides guidelines for determining the monthly corporate bond yield curve, and the 24-month average corporate bond segment rates used to compute the target normal cost and the funding target. Consistent with the methodology specified in Notice 2007–81, the monthly corporate bond yield curve derived from May 2018 data is in Table 2018–5 at the end of this notice. The spot first, second, and third segment rates for the month of May 2018 are, respectively, 3.08, 4.19, and 4.58.
The 24-month average segment rates determined under § 430(h)(2)(C)(i) through (iii) must be adjusted pursuant to § 430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates. For plan years beginning before 2021, the applicable minimum percentage is 90% and the applicable maximum percentage is 110%. The 25-year average segment rates for plan years beginning in 2017 and 2018 were published in Notice 2016–54, 2016–40 I.R.B. 429, and Notice 2017–50, 2017–41 I.R.B. 280, respectively.
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.
Comments and requests for a public hearing must be received by September 10, 2018.
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).
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).
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).
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).
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, § 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.
Institutional investors have suggested clarification of the scope of the regulatory definition of investment-type property under § 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. 99–841, 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.
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.
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.
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.
1. Adding an entry for § 1.148–1(e)(4).
2. Adding an entry for § 1.148–11(n).
§ 1.148–1 Definitions and elections.
(4) Exception for certain capital projects.
1. Revising the first sentence of paragraph (e)(1).
(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.
(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.

References: § 417
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