Td 8718

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income Housing
Credit
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of June 1997. See Rev. Rul. 97–24, page
17.

Section 148.—Arbitrage
26 CFR 1.148–4: Yield on an issue of bonds.

T.D. 8718
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Arbitrage Restrictions on
Tax-Exempt Bonds
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations on the arbitrage and
related restrictions applicable to taxexempt bonds issued by State and local
governments. Changes to the applicable
law were made by the Tax Reform Act
of 1986, the Technical and Miscellaneous Revenue Act of 1988, the Revenue Reconciliation Act of 1989, and
the Revenue Reconciliation Act of 1990.
These regulations affect issuers of taxexempt bonds and provide guidance for
complying with the arbitrage and related
restrictions.
DATES: These regulations are effective
May 9, 1997.
For dates of applicability of these
regulations, see §§ 1.103–8(a)(5),
1.142–4(d), 1.148–11, 1.148–11A,
1.149(d)–1(g)(3), and 1.150–1(a)(2).
FOR FURTHER INFORMATION CONTACT: Brigitte Finley, (202) 622–3980
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control
number 1545–1347. Responses to these
collections of information are required
to obtain a benefit from treating a

contract as a qualified hedge or treating
certain general obligation bonds as a
single issue.
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 estimated average annual burden
hours per recordkeeper: 2 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, T:FP, Washington, DC 20024, and 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.
Books or records relating to collections 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 are confidential, as required by 26 U.S.C. 6103.
Background
Section 148 of the Internal Revenue
Code restricts the use of proceeds of
tax-exempt State and local bonds to
acquire higher yielding investments. On
June 18, 1993, final regulations (T.D.
8476) relating to the arbitrage restrictions and related rules under sections
103, 148, 149, and 150 (the June 1993
regulations) were published in the Federal Register (59 FR 33510). Corrections to the June 1993 regulations were
published in the Federal Register on
August 23, 1993 (58 FR 44451), and
May 11, 1994 (59 FR 24350).
On May 10, 1994, temporary and
final regulations (T.D. 8538) to clarify
and revise certain provisions of the June
1993 regulations were published in the
Federal Register (59 FR 24039). A
notice of proposed rulemaking (FI–7–
94) cross-referencing the temporary
regulations and proposing additional
changes to the June 1993 regulations
was published in the Federal Register
on the same day (59 FR 24094). Written
comments were received, and a public
hearing was held on September 25,
1995.
After consideration of all the comments, the proposed regulations have
been modified and are adopted in final
form, and the corresponding temporary

4

regulations are redesignated as final
regulations. The principal changes to the
regulations, as well as the major comments and suggestions, are discussed
below. Comments relating to regulations
under section 148 other than those in
the proposed regulations also were received. The changes requested by those
comments are not addressed in these
final regulations, but are under consideration.
Explanation of Provisions
A. Section 1.142–4—Interest on Bonds
to Finance Certain Exempt Facilities
The proposed regulations provide
generally that costs incurred before the
issue date of an exempt facility bond
may not be financed with the proceeds
of that bond unless an official action
was taken within 60 days of the date
those costs were incurred. For taxexempt bonds subject to § 1.150–2,
however, a reimbursement allocation
may be made if the official action was
taken within 60 days of the date that the
costs were paid. One commentator requested that the official action and reimbursement allocation rules for exempt
facility bonds be the same as the rules
in § 1.150–2. The final regulations generally adopt this suggestion. The final
regulations also clarify that a refinancing of a taxable debt other than a State
or local bond is not treated as a refunding for purposes of this rule. In addition,
the final regulations redesignate this
provision, which was previously contained in § 1.103–8(a)(5), as new
§ 1.142–4.
B. Section 1.148–1—Definitions and
Elections
1. Bonds Financing a Working Capital
Reserve
The June 1993 regulations provide
that replacement proceeds may arise if a
working capital reserve is directly or
indirectly financed with bond proceeds,
but not to the extent the issuer has
maintained a working capital reserve.
The proposed regulations provide a
method for determining whether an issuer has maintained a working capital
reserve. This method is based on the
average amount of working capital
maintained by the issuer before the issue
date of the bonds.
One commentator stated that start-up
operations are unable to demonstrate

any average reserves for past periods
and, therefore, cannot show that they
have not indirectly financed a working
capital reserve with bond proceeds.
The determination of whether an issuer has financed a working capital
reserve with bond proceeds is based on
facts and circumstances. The method in
the proposed regulations provides one
way of making that determination. An
issuer may use alternative methods to
establish that a working capital reserve
is not indirectly financed with bond
proceeds. Therefore, the final regulations adopt the provision in the proposed regulations.
2. Definition of Investment-type Property
The proposed regulations clarify that
the definition of investment-type property includes a contract that would be a
hedge under § 1.148–4(h) except that it
contains a significant investment element. The proposed regulations also
provide that an interest rate cap contains
a significant investment element if the
payments for the cap are made more
quickly than in level annual installments
over the term of the cap, the cap hedges
a bond that is not a variable rate debt
instrument (VRDI) under § 1.1275–5,
or the cap rate is less than the onmarket swap rate on the date the cap is
entered into.
Commentators requested that the provisions relating to whether an interest
rate cap contains a significant investment element be deleted because they
asserted that those conditions do not
give rise to an expected return from the
cap. One commentator stated that these
rules were misplaced and should be
included in the provision in § 1.148–
4(h) dealing with significant investment
element.
The final regulations modify the proposed regulations in several ways. First,
the provision that a cap contains a
significant investment element if the cap
rate is less than the on-market swap rate
has been deleted. The deletion of this
rule is balanced by another rule addressing the timing of payments for a cap.
(See discussion below.) Second, the requirement relating to the pattern of
payments for a cap and the prohibition
on hedging an instrument other than a
VRDI have been moved to § 1.148–
4(h). (See discussion below.) Third, the
final regulations clarify that investmenttype property includes only the investment element of a hedge that contains a
significant investment element. This ele-

ment does not necessarily include all
payments on or receipts from a hedge.
C. Section 1.148–4—Yield on an Issue
of Bonds
1. Yield on Certain Mortgage Revenue
and Student Loan Bonds
The proposed regulations provide that,
for purposes of applying sections 148
and 143(g) to a variable yield issue of
qualified mortgage bonds, qualified veterans’ mortgage bonds, or qualified student loan bonds, the yield on the issue
is computed over the term of the issue,
and § 1.148–4(d) (relating to conversion
from a variable yield issue to a fixed
yield issue) does not apply. The proposed regulations also address how to
compute yield over the term of the
issue.
One commentator requested that this
rule be amended so it applies only for
yield restriction purposes or only to
variable yield issues that are expected to
convert to fixed yield issues. The commentator explained that applying the
rule for rebate purposes may be inappropriate. The final regulations generally
adopt this comment by providing that
the rule applies only to issues that are
expected to convert to a fixed yield and
only for purposes of applying sections
148 and 143(g) to purpose investments.
2. Qualified Hedging Transactions
a. Definition of hedge. The final regulations expand the definition of hedge to
include certain hedges of bonds of an
issue that would otherwise be a fixed
yield issue (a fixed-to-variable hedge).
Generally, a fixed-to-variable hedge
must be entered into no later than 15
days after the issue date of the issue (or
the deemed issue date under § 1.148–
4(d)) or no later than the expiration of
another qualified hedge with respect to
the bonds. The permitted fixed-tovariable hedges are limited in this manner to minimize the complex computations and potential for abuse that may
arise if an issue switches between fixed
yield treatment and variable yield treatment during the term of the issue.
Comments are requested on the extent
to which other fixed-to-variable hedges
should be treated as a hedge.
b. Significant investment element. The
definition of investment-type property in
the proposed regulations provides that
an interest rate cap contains a significant
investment element if the payments for
the cap are made more quickly than in

5

level annual installments. Commentators
requested that this provision be deleted
because they asserted that early payment
of a cap premium never gives rise to an
expected return from the cap.
Amounts paid for an interest rate cap
generally relate increasingly to the later
years of the term of the cap. Thus, this
rule reflects the concern that the issuer
receives an arbitrage benefit by making
a prepayment. This prepayment concern
also arises in connection with other
types of hedges when an issuer makes
payments before the period to which
those payments relate. Therefore, the
final regulations provide that a hedge
contains a significant investment element if the issuer’s payments for the
hedge are significantly front-loaded. In
addition, a hedge contains a significant
investment element if the issuer’s payments are significantly back-loaded. The
final regulations also include a special
rule for caps that permits cap fees to be
paid in level installments over the term
of the cap.
c. Interest based. The definition of
investment-type property in the proposed regulations provides that an interest rate cap contains a significant investment element if the cap hedges a bond
that is not a VRDI within the meaning
of § 1.1275–5. Commentators requested
that this provision be deleted because
they asserted that hedging a bond that is
not a VRDI does not give rise to an
expected return from the cap.
The final regulations clarify that a
contract meets the requirement that it be
interest based only if, (i) before the
contract is taken into account, each
hedged bond is a type of obligation that
is respected as solely tax-exempt debt
under the original issue discount regulations (i.e., a fixed rate bond, a VRDI
within the meaning of § 1.1275–5 that
is not based on an objective rate other
than a qualified inverse floating rate or
a qualified inflation rate, a tax-exempt
obligation described in § 1.1275–
4(d)(2), or an inflation-indexed debt instrument within the meaning of
§ 1.1275–7T), and (ii) after the contract
is taken into account, each hedged bond
is substantially the same as one of these
types of debt instruments.
d. Timing and allocation of payments.
The proposed regulations provide that
the period to which a payment made by
the issuer relates is based on general
Federal income tax principles, and that
generally a payment received by the
issuer is taken into account in the period

that the interest payment that the payment hedges is required to be made. The
final regulations amend these rules to
provide that payments made or received
by the issuer under a qualified hedge are
taken into account in the period that
those amounts would be treated as income or deductions under § 1.446–4
(without regard to the exclusion from
§ 1.446–4 for tax-exempt obligations).
e. Certain variable yield bonds treated
as fixed yield bonds—certain terminations disregarded. Under the June 1993
regulations, a variable yield issue is
treated as a fixed yield issue if the
issuer enters into a qualified hedge that
meets certain requirements. The proposed regulations in general provide that
upon a termination of this type of
qualified hedge, the issue of which the
hedged bonds are a part is treated for
purposes of § 1.148–3 (relating to rebate) as if it were reissued as of the
termination date. The proposed regulations also provide that the termination
will be disregarded (i.e., the issue will
continue to be treated as a fixed yield
issue) if (i) the issuer immediately replaces the terminated hedge and there is
no change in the yield or (ii) the
termination is caused by the bankruptcy
or insolvency of the hedge provider and
the Commissioner determines that the
termination occurred without any action
by the issuer. The final regulations
modify the proposed regulations by deleting the provision relating to terminations of a qualified hedge caused by the
bankruptcy or insolvency of the hedge
provider because, unless the issuer enters into a replacement hedge, any termination of the hedge may cause a
change in the yield on the bonds.
f. Certain acquisition payments. The
proposed regulations provide that if an
issuer receives a single, up-front payment relating to the off-market portion
of an otherwise qualified hedge, the
hedge does not fail to be a qualified
hedge as long as the off-market rates are
separately identified and are not taken
into account in determining yield on the
bonds. The proposed regulations also
provide that the on-market rates are
determined as of the date the parties
enter into the contract. The final regulations adopt this rule. In the case of
hedges entered into before the issue date
(e.g., a forward swap), the on-market
rate is the forward on-market rate on the
date the parties enter into the hedge.

g. Treatment of hedges entered into before issue date of hedged bonds. The
proposed regulations provide that a
hedge entered into before the issue date
may be a qualified hedge, even if the
payments received by the issuer do not
correspond to interest payments on the
hedged bonds. Commentators requested
clarification about what other special
rules apply to these types of hedges. In
particular, commentators suggested that
payments made or received by an issuer
before the issue date should not prevent
these types of hedges from treatment as
a qualified hedge.
The final regulations clarify the treatment of two different types of hedges
entered into before the issue date. First,
if an issuer expects that a hedge will be
closed in connection with the issuance
of bonds, payments on the hedge made
or received, or deemed made or received, adjust the issue price of the
hedged bonds. For this purpose, issue
price is adjusted by taking into account
the future value as of the issue date of
the payments made or received before
the issue date. Second, if an issuer does
not expect that a hedge will be closed in
connection with the issuance of the
bonds and does not close the hedge in
connection with the issuance of the
bonds, the payments and receipts on the
hedge adjust payments and receipts on
the hedged bonds in the same manner as
other qualified hedges. Payments on the
hedge made by the issuer before the
issue date, however, are not taken into
account for purposes of determining
yield on the hedged bond.

tive. Section 1.148–10(e) gives the
Commissioner the authority to depart
from the rules of §§ 1.148–1 through
1.148–11 to reflect the economic substance of a transaction if a principal
purpose of the transaction is to obtain
an arbitrage benefit that is inconsistent
with the purposes of section 148. Therefore, in general a separate anti-abuse
rule is unnecessary. The final regulations
amend § 1.148–10(e) to clarify that the
actions the Commissioner may take to
clearly reflect the economic substance of
a transaction include treating a hedge as
a qualified hedge or treating a hedge as
other than a qualified hedge. Because
special considerations apply to identification of hedges entered into before the
issue date of the hedged bonds, the final
regulations also provide that this type of
hedge will be treated as a hedge of
bonds that are similar to the bonds that
the issuer expected to issue when it
entered into the hedge.

h. Authority of Commissioner. The proposed regulations permit the Commissioner to determine that a contract is not
a qualified hedge if treating the contract
as a qualified hedge provides a material
potential for arbitrage. In addition, the
proposed regulations permit the Commissioner to recompute the yield on an issue
by taking into account a hedge if the
issuer fails to meet the qualified hedge
rules and the failure distorts the yield or
otherwise fails to clearly reflect the economic substance of the transaction.

D. Section 1.148–5—Yield and Valuation of Investments

Some commentators asserted that this
grant of authority is too broad and adds
uncertainty about the proper treatment
of certain transactions that are not specifically addressed by the regulations,
such as asset hedges.
In general, an issuer may choose
whether a hedge is treated as a qualified
hedge, as long as that choice is prospec-

6

i. Asset hedging. The proposed regulations do not provide specific rules for
the treatment of hedges of assets allocable to the proceeds of tax-exempt
bonds. One commentator suggested that
the regulations extend the integration
principles currently applicable to qualified hedges to include comparable principles for hedges of assets allocable to
the proceeds of tax-exempt bonds. The
final regulations do not adopt this comment or provide specific rules for asset
hedging. However, comments are requested relating to the proper treatment
of asset hedges for purposes of section
148.

1. Permissive Application of Single Investment Rules to Certain Yield Restricted Investments for all Purposes
of Section 148
The proposed regulations provide that
for all purposes of section 148, an issuer
may blend the yield of all yield restricted, nonpurpose investments in a
refunding escrow and a sinking fund
that is reasonably expected as of the
issue date to be maintained to reduce
the yield on the investments in the
refunding escrow. Commentators requested that this rule be amended to
permit blending of the yield on all yield
restricted nonpurpose investments. The
final regulations do not adopt this comment because a more flexible yield
blending rule could permit avoidance of
the requirement that rebatable arbitrage

must be paid for periods of no greater
than 5 years. In addition, the final
regulations clarify that the rule applies
only to sinking funds that are reasonably
expected as of the issue date to be
established and maintained solely to
reduce the yield on the investments in
the refunding escrow. For example, the
rule does not apply to investments in a
reasonably required reserve fund that the
issuer intends to use to reduce the yield
on the investments in a refunding escrow.
2. Manner of Payment of Yield Reduction Payments
The proposed regulations provide that
yield reduction payments must be made
at the same time and in the same
manner as rebate amounts are required
to be paid under § 1.148–3(f), and that
the date a payment is required to be
paid is determined without regard to
§ 1.148–3(h), which allows the issuer to
pay a penalty in lieu of loss of taxexemption in certain situations. The proposed regulations also provide that a
yield reduction payment that is paid
untimely is not taken into account unless the Commissioner determines that
the failure to pay timely is not due to
willful neglect.
One commentator noted that this rule
imposes a procedural standard that is
different from the rules regarding late
rebate payments and requested that this
rule be amended to eliminate the requirement of action by the Commissioner and to otherwise conform to the
rules for late payment of rebate. The
final regulations adopt this comment.
3. External Commingled Funds
The June 1993 regulations provide
that an issuer that invests in a commingled fund may take indirect administrative costs of the commingled fund
into account for purposes of determining
payments and receipts on nonpurpose
investments if certain requirements are
met. In general, the issuer and any
related parties must not own more than
10 percent of the beneficial interest in
the fund. The proposed regulations provide a test for determining whether the
10 percent limit is met.
One commentator stated that under
the method for determining whether the
10 percent requirement is met the investor is uncertain whether its deposit will
cause it to exceed the 10 percent limit,
whether actions of another investor will
cause it to exceed the 10 percent limit at
any time for the duration of this invest-

ment, whether the whole fund is tainted
if one investor exceeds the 10 percent
limit, whether the impact is limited to
those days that the 10 percent limit is
exceeded, how the 10 percent limit is
measured, and whether the semiannual
period is a fixed or a floating period.
The commentator suggested that the test
should be applied only at the time that a
deposit is made and the result should
not be affected by simultaneous or subsequent activity in the pool.
The final regulations generally adopt
this suggestion. The final regulations
clarify that this rule applies only to
widely held commingled funds and that
the determination of whether a fund is
widely held is based on the average
number of investors during the immediately preceding, fixed, semiannual period chosen by the fund (e.g., semiannual periods ending June 30 and
December 31). Thus, the determination
of whether any issuer that has invested
in a commingled fund may take indirect
administrative costs into account may
change from one 6-month period to
another. The final regulations also provide that the determination of whether
an investor exceeds the 10 percent limit
is made on the date of deposit into the
commingled fund and whether that investor exceeds the 10 percent limit is
not affected by subsequent actions of
investors in the fund. In addition, if any
investor exceeds the 10 percent limit, no
investor in the fund may take indirect
administrative costs into account until
that investor makes sufficient withdrawals from the fund to meet the 10 percent
limit. Thus, if a fund continues to be
widely held and does not accept any
deposits from an investor that exceeds
the 10 percent limit, all issuers that have
invested tax-exempt bond proceeds in
the fund may take the indirect administrative costs of the fund into account.

regulations clarify that a broker’s commission is a qualified administrative cost
to the extent it does not exceed the
lesser of a reasonable amount or the .05
percent limit. No inference should be
drawn that there are necessarily any
situations in which a commission equal
to .05 percent is reasonable.
E. Section 1.150–1—Definitions
The proposed regulations define ‘‘issue’’ for all purposes of sections 103
and 141 through 150. The final regulations adopt the definition as proposed
with one modification. The final regulations delete the rule that a variable yield
bond is treated as sold on its issue date
and clarify that the definition of ‘‘sale
date’’ applies to all bonds.
The proposed regulations also provide
a special rule relating to the treatment of
general obligation bonds sold and issued
on the same dates pursuant to a single
offering document as part of the same
issue. Commentators expressed concern
that this special rule is mandatory and
conflicts with other rules relating to the
determination of whether bonds are part
of a single issue. The commentators
requested that the relationship of the
rules be clarified and that the general
obligation rule not be mandatory.
The final regulations generally adopt
these comments by permitting an issuer
to elect to treat tax-exempt general
obligation bonds sold and issued on the
same dates pursuant to a single offering
document as part of the same issue.
However, taxable bonds still must be
treated as a separate issue. A proposed
amendment to the exception for taxable
bonds in § 1.150–1(c)(2), proposed in
regulations published in the Federal
Register on December 30, 1994, is not
addressed by these final regulations.

4. Qualified Administrative Costs of
Guaranteed Investment Contracts

F. Effective Dates

The June 1993 regulations generally
provide that administrative costs must
be reasonable in order to be qualified
administrative costs. The proposed regulations provide that a broker’s commission for a guaranteed investment contract is treated as an administrative cost
and is not a qualified administrative cost
to the extent that the present value of
the fee exceeds the present value of
annual payments equal to .05 percent of
the weighted average amount reasonably
expected to be invested each year during
the term of the contract. The final

The final regulations generally are
effective for bonds issued on or after
July 8, 1997. An issuer generally may
apply the final regulations to bonds that
are outstanding on July 8, 1997, and to
which certain prior regulations apply. In
addition, the rules in the temporary
regulations have been redesignated as
§§ 1.148–1A through 1.148–6A, 1.148–
9A, 1.148–10A, 1.148–11A, 1.149(d)–
1A, and 1.150–1A and, together with the
applicable provisions of the June 1993
regulations, continue to apply to bonds
issued before July 8, 1997.

7

Special Analysis
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) does
not apply to these regulations, and because the notice of proposed rulemaking
preceding the regulations was issued
prior to March 29, 1996, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, the notice of
proposed rulemaking preceding these
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal authors of these regulations are Brigitte Finley and William P.
Cejudo, Office of Assistant Chief Counsel (Financial Institutions and Products).
However, other personnel from the IRS
and Treasury Department participated in
their development.
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Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for § 1.148–11T to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In § 1.103–8, paragraph (a)(5)
is revised to read as follows:
§ 1.103–8 Interest on bonds to finance
certain exempt facilities.
(a) * * *
(5) Limitation. (i) A facility qualifies
under this section only to the extent that
there is a valid reimbursement allocation
under § 1.150–2 with respect to expenditures that are incurred before the issue
date of the bonds to provide the facility
and that are to be paid with the proceeds of the issue. In addition, if the
original use of the facility begins before
the issue date of the bonds, the facility
does not qualify under this section if
any person that was a substantial user of
the facility at any time during the 5-year
period before the issue date or any

related person to that user receives (directly or indirectly) 5 percent or more of
the proceeds of the issue for the user’s
interest in the facility and is a substantial user of the facility at any time
during the 5-year period after the issue
date, unless—
(A) An official intent for the facility
is adopted under § 1.150–2 within 60
days after the date on which acquisition,
construction, or reconstruction of that
facility commenced; and
(B) For an acquisition, no person that
is a substantial user or related person
after the acquisition date was also a
substantial user more than 60 days before the date on which the official intent
was adopted.
(ii) A facility, the original use of
which commences (or the acquisition of
which occurs) on or after the issue date
of bonds to provide that facility, qualifies under this section only to the extent
that an official intent for the facility is
adopted under § 1.150–2 by the issuer
of the bonds within 60 days after the
commencement of the construction, reconstruction, or acquisition of that facility. Temporary construction or other financing of a facility prior to the
issuance of the bonds to provide that
facility will not cause that facility to be
one that does not qualify under this
paragraph (a)(5)(ii).
(iii) For purposes of paragraph
(a)(5)(i) of this section, substantial user
has the meaning used in section
147(a)(1), related person has the meaning used in section 144(a)(3), and a user
that is a governmental unit within the
meaning of § 1.103–1 is disregarded.
(iv) Except to the extent provided in
§§ 1.142–4(d), 1.148–11A(i), and
1.150–2(j), this paragraph (a)(5) applies
to bonds issued after June 30, 1993, and
sold before July 8, 1997. See § 1.142–
4(d) for rules relating to bonds sold on
or after July 8, 1997.
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§ 1.103–8T [Removed]
Par. 3. Section 1.103–8T is removed.
Par. 4. Section 1.142–4 is added to
read as follows:
§ 1.142–4 Use of proceeds to provide a
facility.
(a) In general. [Reserved].
(b) Reimbursement allocations. If an
expenditure for a facility is paid before
the issue date of the bonds to provide
that facility, the facility is described in
section 142(a) only if the expenditure

8

meets the requirements of § 1.150–2
(relating to reimbursement allocations).
For purposes of this paragraph (b), if the
proceeds of an issue are used to pay
principal of or interest on an obligation
other than a State or local bond (for
example, temporary construction financing of the conduit borrower), that issue
is not a refunding issue, and, thus,
§ 1.150–2(g) does not apply.
(c) Limitation on use of facilities by
substantial users—(1) In general. If the
original use of a facility begins before
the issue date of the bonds to provide
the facility, the facility is not described
in section 142(a) if any person that was
a substantial user of the facility at any
time during the 5-year period before the
issue date or any related person to that
user receives (directly or indirectly) 5
percent or more of the proceeds of the
issue for the user’s interest in the facility and is a substantial user of the
facility at any time during the 5-year
period after the issue date, unless—
(i) An official intent for the facility is
adopted under § 1.150–2 within 60 days
after the date on which acquisition,
construction, or reconstruction of that
facility commenced; and
(ii) For an acquisition, no person that
is a substantial user or related person
after the acquisition date was also a
substantial user more than 60 days before the date on which the official intent
was adopted.
(2) Definitions. For purposes of paragraph (c)(1) of this section, substantial
user has the meaning used in section
147(a)(1), related person has the meaning used in section 144(a)(3), and a user
that is a governmental unit within the
meaning of § 1.103–1 is disregarded.
(d) Effective date—(1) In general.
This section applies to bonds sold on or
after July 8, 1997. See § 1.103–8(a)(5)
for rules applicable to bonds sold before
that date.
(2) Elective retroactive application.
An issuer may apply this section to any
bond sold before July 8, 1997.
Par. 5. In § 1.148–0, paragraph (c) is
amended as follows:
1. An entry for § 1.148–1, paragraph
(e) is added.
2. The entries for § 1.148–4, paragraph (h)(4) and (h)(5) are revised.
3. An entry for § 1.148–4, paragraph
(h)(6) is added.
4. An entry for § 1.148–11, paragraph (b)(3) is added.
5. Entries for § 1.148–11, paragraphs
(c)(1) and (g) are revised.

6. Entries for § 1.148–11, paragraphs
(h) and (i) are removed.
The revised and added provisions
read as follows:
§ 1.148–0 Scope and table of contents.
*

*

*

*

*

(c) * * *
§ 1.148–1 Definitions and elections.
*

*

*

*

*

(e) Investment-type property.
*

*

*

*

Par. 7. Section 1.148–1 is amended as
follows:
1. Paragraph (b) is amended by revising the definition of Investment-type
property, by adding the definition of
Replacement proceeds, and by adding a
new sentence at the end of the definition
of Sale proceeds.
2. Paragraph (c)(4)(ii)(A) is revised.
3. Paragraph (e) is added.
The revised and added provisions
read as follows:

*

§ 1.148–1 Definitions and elections.
§ 1.148–4 Yield on an issue of bonds.
*

*

*

*

*

(h) * * *
(4) Certain variable yield bonds
treated as fixed yield bonds.
(5) Contracts entered into before issue date of hedged bond.
(6) Authority of the Commissioner.
*

*

*

*

*

§ 1.148–11 Effective dates.
*

*

*

*

*

(b) * * *
(3) No elective retroactive application
for hedges of fixed rate issues.
(c) * * *
(1) Retroactive application of overpayment recovery provisions.
*

*

*

*

*

(g) Provisions applicable to certain
bonds sold before effective date.
§§ 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 [Redesignated as §§ 1.148–1A, 1.148–2A,
1.148–3A, 1.148–4A, 1.148–5A, 1.148–
6A, 1.148–9A, 1.148–10A, and 1.148–
11A]
Par. 6. Sections 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 are redesignated as §§ 1.148–1A,
1.148–2A, 1.148–3A, 1.148–4A, 1.148–
5A, 1.148–6A, 1.148–9A, 1.148–10A,
and 1.148–11A, respectively, and added
under an undesignated center heading
immediately preceding the undesignated
center heading ‘‘Deductions for Personal
Exemptions’’ to read as follows:
Regulations Applicable to Certain
Bonds Sold Prior to July 8, 1997.
Par. 6a. The section headings of
newly designated §§ 1.148–1A, 1.148–
2A, 1.148–3A, 1.148–4A, 1.148–5A,
1.148–6A, 1.148–9A, 1.148–10A, and
1.148–11A are amended by removing
the language ‘‘(temporary)’’.

*

*

*

*

*

*

*

*

*

(b) * * *
*

Investment-type property is defined in
paragraph (e) of this section.
*

*

*

*

*

Replacement proceeds is defined in
paragraph (c) of this section.
*

*

*

*

*

Sale proceeds * * * See also
§ 1.148–4(h)(5) treating amounts received upon the termination of certain
hedges as sale proceeds.
*

*

*

*

*

(c) * * *
(4) * * *
(ii) Bonds financing a working capital reserve—(A) In general. Except as
otherwise provided in paragraph
(c)(4)(ii)(B) of this section, replacement
proceeds arise to the extent a working
capital reserve is, directly or indirectly,
financed with the proceeds of the issue
(regardless of the expenditure of proceeds of the issue). Thus, for example,
if an issuer that does not maintain a
working capital reserve borrows to fund
a working capital reserve, the issuer will
have replacement proceeds. To determine the amount of a working capital
reserve maintained, an issuer may use
the average amount maintained as a
working capital reserve during annual
periods of at least 1 year, the last of
which ends within 1 year before the
issue date. For example, the amount of a
working capital reserve may be computed using the average of the beginning
or ending monthly balances of the
amount maintained as a reserve (net of
unexpended gross proceeds) during the
1 year period preceding the issue date.
*

*

*

*

*

(e) Investment-type property—(1) In
general. 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. For this purpose, production of

9

income includes any benefit based on
the time value of money, including the
benefit from making a prepayment.
(2) Non-customary prepayments. Except as otherwise provided in this paragraph (e), a prepayment for property or
services gives rise to investment-type
property if a principal purpose for prepaying is to receive an investment return
from the time the prepayment is made
until the time payment otherwise would
be made. A prepayment does not give
rise to investment-type property if—
(i) The prepayment is made for a
substantial business purpose other than
investment return and the issuer has no
commercially reasonable alternative to
the prepayment; or
(ii) Prepayments on substantially the
same terms are made by a substantial
percentage of persons who are similarly
situated to the issuer but who are not
beneficiaries of tax-exempt financing.
(3) Certain hedges. Investment-type
property also includes the investment
element of a contract that is a hedge
(within the meaning of § 1.148–
4(h)(2)(i)(A)) and that contains a significant investment element because a payment by the issuer relates to a
conditional or unconditional obligation
by the hedge provider to make a payment on a later date. See § 1.148–
4(h)(2)(ii) relating to hedges with a
significant investment element.
Par. 8. In § 1.148–2, paragraph
(b)(2)(ii) is revised to read as follows:
§ 1.148–2 General arbitrage yield restriction rules.
*

*

*

*

*

(b) * * *
(2) * * *
(ii) Exceptions to certification requirement. An issuer is not required to
make a certification for an issue under
paragraph (b)(2)(i) of this section if—
(A) The issuer reasonably expects as
of the issue date that there will be no
unspent gross proceeds after the issue
date, other than gross proceeds in a
bona fide debt service fund (e.g., equipment lease financings in which the issuer purchases equipment in exchange
for an installment payment note); or
(B) The issue price of the issue does
not exceed $1,000,000.
*

*

*

*

*

Par. 9. In § 1.148–3, the last sentence
of paragraph (h)(3) is revised to read as
follows:

§ 1.148–3 General arbitrage rebate
rules.
*

*

*

*

*

(h) * * *
(3) * * * For purposes of this paragraph (h)(3), willful neglect does not
include a failure that is attributable
solely to the permissible retroactive selection of a short first bond year if the
rebate amount that the issuer failed to
pay is paid within 60 days of the
selection of that bond year.
*

*

*

*

*

Par. 10. Section 1.148–4 is amended
as follows:
1. Paragraphs (b)(5), (g), (h)(1),
(h)(2) introductory text, and (h)(2)(i) are
revised.
2. Paragraph (h)(2)(vi) and (h)(2)(vii)
are removed.
3. Paragraphs (h)(2)(ii) through
(h)(2)(v) are redesignated as paragraphs
(h)(2)(iii) through (h)(2)(vi) and paragraphs (h)(2)(viii) and (h)(2)(ix) are redesignated as paragraphs (h)(2)(vii) and
(h)(2)(viii).
4. New paragraph (h)(2)(ii) is added.
5. Newly designated paragraphs
(h)(2)(iv), (h)(2)(v), (h)(2)(vi), and
(h)(2)(viii) and paragraphs (h)(3), (h)(4),
and (h)(5) are revised.
6. Paragraph (h)(6) is added.
The revised and added provisions
read as follows:
§ 1.148–4 Yield on an issue of bonds.
*

*

*

*

*

(b) * * *
(5) Special aggregation rule treating
certain bonds as a single fixed yield
bond. Two variable yield bonds of an
issue are treated in the aggregate as a
single fixed yield bond if—
(i) Aggregate treatment would result
in the single bond being a fixed yield
bond; and
(ii) The terms of the bonds do not
contain any features that could distort
the aggregate fixed yield from what the
yield would be if a single fixed yield
bond were issued. For example, if an
issue contains a bond bearing interest at
a floating rate and a related bond bearing interest at a rate equal to a fixed
rate minus that floating rate, those two
bonds are treated as a single fixed yield
bond only if neither bond may be
redeemed unless the other bond is also
redeemed at the same time.
*

*

*

*

*

(g) Yield on certain mortgage revenue
and student loan bonds. For purposes of
section 148 and this section, section
143(g)(2)(C)(ii) applies to the computa-

tion of yield on an issue of qualified
mortgage bonds or qualified veterans’
mortgage bonds. For purposes of applying section 148 and section 143(g) with
respect to purpose investments allocable
to a variable yield issue of qualified
mortgage bonds, qualified veterans’
mortgage bonds, or qualified student
loan bonds that is reasonably expected
as of the issue date to convert to a fixed
yield issue, the yield may be computed
over the term of the issue, and, if the
yield is so computed, paragraph (d) of
this section does not apply to the issue.
As of any date, the yield over the term
of the issue is based on—
(1) With respect to any bond of the
issue that has not converted to a fixed
and determinable yield on or before that
date, the actual amounts paid or received to that date and the amounts that
are reasonably expected (as of that date)
to be paid or received with respect to
that bond over the remaining term of the
issue (taking into account prepayment
assumptions under section 143(g)(2)(B)(iv), if applicable); and
(2) With respect to any bond of the
issue that has converted to a fixed and
determinable yield on or before that
date, the actual amounts paid or received before that bond converted, if
any, and the amount that was reasonably
expected (on the date that bond converted) to be paid or received with
respect to that bond over the remaining
term of the issue (taking into account
prepayment assumptions under section
143(g)(2)(B)(iv), if applicable).
(h) Qualified hedging transactions—
(1) In general. Payments made or received by an issuer under a qualified
hedge (as defined in paragraph (h)(2) of
this section) relating to bonds of an
issue are taken into account (as provided
in paragraph (h)(3) of this section) to
determine the yield on the issue. Except
as provided in paragraphs (h)(4) and
(h)(5)(ii)(E) of this section, the bonds to
which a qualified hedge relates are
treated as variable yield bonds from the
issue date of the bonds. This paragraph
(h) applies solely for purposes of sections 143(g), 148, and 149(d).
(2) Qualified hedge defined. Except
as provided in paragraph (h)(5) of this
section, the term qualified hedge means
a contract that satisfies each of the
following requirements:
(i) Hedge—(A) In general. The contract is entered into primarily to modify
the issuer’s risk of interest rate changes
with respect to a bond (a hedge). For
example, the contract may be an interest

10

rate swap, an interest rate cap, a futures
contract, a forward contract, or an option.
(B) Special rule for fixed rate issues.
If the contract modifies the issuer’s risk
of interest rate changes with respect to a
bond that is part of an issue that, absent
the contract, would be a fixed rate issue,
the contract must be entered into—
(1) No later than 15 days after the
issue date (or the deemed issue date
under paragraph (d) of this section) of
the issue; or
(2) No later than the expiration of a
qualified hedge with respect to bonds of
that issue that satisfies paragraph
(h)(2)(i)(B)(1) of this section; or
(3) No later than the expiration of a
qualified hedge with respect to bonds of
that issue that satisfies either paragraph
(h)(2)(i)(B)(2) of this section or this
paragraph (h)(2)(i)(B)(3).
(C) Contracts with certain acquisition
payments. If a hedge provider makes a
single payment to the issuer (e.g., a
payment for an off-market swap) in
connection with the acquisition of a
contract, the issuer may treat a portion
of that contract as a hedge provided—
(1) The hedge provider’s payment to
the issuer and the issuer’s payments
under the contract in excess of those
that it would make if the contract bore
rates equal to the on-market rates for the
contract (determined as of the date the
parties enter into the contract) are separately identified in a certification of the
hedge provider; and
(2) The payments described in paragraph (h)(2)(i)(C)(1) of this section are
not treated as payments on the hedge.
(ii) No significant investment element—(A) In general. The contract
does not contain a significant investment
element. Except as provided in paragraph (h)(2)(ii)(B) of this section, a
contract contains a significant investment element if a significant portion of
any payment by one party relates to a
conditional or unconditional obligation
by the other party to make a payment
on a different date. Examples of contracts that contain a significant investment element are a debt instrument held
by the issuer; an interest rate swap
requiring any payments other than periodic payments, within the meaning of
§ 1.446–3 (periodic payments) (e.g., a
payment for an off-market swap or
prepayment of part or all of one leg of a
swap); and an interest rate cap requiring
the issuer’s premium for the cap to be
paid in a single, up-front payment.

(B) Special level payment rule for
interest rate caps. An interest rate cap
does not contain a significant investment
element if—
(1) All payments to the issuer by the
hedge provider are periodic payments;
(2) The issuer makes payments for
the cap at the same time as periodic
payments by the hedge provider must be
made if the specified index (within the
meaning of § 1.446–3) of the cap is
above the strike price of the cap; and
(3) Each payment by the issuer bears
the same ratio to the notional principal
amount (within the meaning of § 1.446–
3) that is used to compute the hedge
provider’s payment, if any, on that date.
*

*

*

*

*

(iv) Hedged bonds. The contract covers, in whole or in part, all of one or
more groups of substantially identical
bonds in the issue (i.e., all of the bonds
having the same interest rate, maturity,
and terms). Thus, for example, a qualified hedge may include a hedge of all or
a pro rata portion of each interest payment on the variable rate bonds in an
issue for the first 5 years following their
issuance. For purposes of this paragraph
(h), unless the context clearly requires
otherwise, hedged bonds means the specific bonds or portions thereof covered
by a hedge.
(v) Interest based contract. The contract is primarily interest based. A contract is not primarily interest based
unless—
(A) The hedged bond, without regard
to the contract, is either a fixed rate
bond, a variable rate debt instrument
within the meaning of § 1.1275–5 provided the rate is not based on an
objective rate other than a qualified
inverse floating rate or a qualified inflation rate, a tax-exempt obligation described in § 1.1275–4(d)(2), or an
inflation-indexed debt instrument within
the meaning of § 1.1275–7T; and
(B) As a result of treating all payments on (and receipts from) the contract as additional payments on (and
receipts from) the hedged bond, the
resulting bond would be substantially
similar to either a fixed rate bond, a
variable rate debt instrument within the
meaning of § 1.1275–5 provided the
rate is not based on an objective rate
other than a qualified inverse floating
rate or a qualified inflation rate, a
tax-exempt obligation described in
§ 1.1275–4(d)(2), or an inflationindexed debt instrument within the
meaning of § 1.1275–7T. For this purpose, differences that would not prevent

the resulting bond from being substantially similar to another type of bond
include a difference between the index
used to compute payments on the
hedged bond and the index used to
compute payments on the hedge where
one index is substantially the same, but
not identical to, the other; the difference
resulting from the payment of a fixed
premium for a cap (e.g., payments for a
cap that are made in other than level
installments); and the difference resulting from the allocation of a termination
payment where the termination was not
expected as of the date the contract was
entered into.
(vi) Payments closely correspond.
The payments received by the issuer
from the hedge provider under the contract correspond closely in time to either
the specific payments being hedged on
the hedged bonds or specific payments
required to be made pursuant to the
bond documents, regardless of the
hedge, to a sinking fund, debt service
fund, or similar fund maintained for the
issue of which the hedged bond is a
part.
*

*

*

*

*

(viii) Identification. The contract
must be identified by the actual issuer
on its books and records maintained for
the hedged bonds not later than 3 days
after the date on which the issuer and
the hedge provider enter into the contract. The identification must specify the
hedge provider, the terms of the contract, and the hedged bonds. The identification must contain sufficient detail to
establish that the requirements of this
paragraph (h)(2) and, if applicable, paragraph (h)(4) of this section are satisfied.
In addition, the existence of the hedge
must be noted on the first form relating
to the issue of which the hedged bonds
are a part that is filed with the Internal
Revenue Service on or after the date on
which the contract is identified pursuant
to this paragraph (h)(2)(viii).
(3) Accounting for qualified hedges—
(i) In general. Except as otherwise provided in paragraph (h)(4) of this section,
payments made or received by the issuer
under a qualified hedge are treated as
payments made or received, as appropriate, on the hedged bonds that are taken
into account in determining the yield on
those bonds. These payments are reasonably allocated to the hedged bonds in
the period to which the payments relate,
as determined under paragraph (h)(3)(iii)
of this section. Payments made or received by the issuer include payments
deemed made or received when a con-

11

tract is terminated or deemed terminated
under this paragraph (h)(3). Payments
reasonably allocable to the modification
of risk of interest rate changes and to
the hedge provider’s overhead under this
paragraph (h) are included as payments
made or received under a qualified
hedge.
(ii) Exclusions from hedge. If any
payment for services or other items
under the contract is not expressly
treated by paragraph (h)(3)(i) of this
section as a payment under the qualified
hedge, the payment is not a payment
with respect to a qualified hedge.
(iii) Timing and allocation of payments. Except as provided in paragraphs
(h)(3)(iv) and (h)(5) of this section,
payments made or received by the issuer
under a qualified hedge are taken into
account in the same period in which
those amounts would be treated as income or deductions under § 1.446–4
(without regard to § 1.446–4(a)(2)(iv))
and are adjusted as necessary to reflect
the end of a computation period and the
start of a new computation period.
(iv) Termination payments—(A) Termination defined. A termination of a
qualified hedge includes any sale or
other disposition of the hedge by the
issuer or the acquisition by the issuer of
an offsetting hedge. A deemed termination occurs when the hedged bonds are
redeemed or when a hedge ceases to be
a qualified hedge of the hedged bonds.
In the case of an assignment by a hedge
provider of its remaining rights and
obligations under the hedge to a third
party or a modification of the hedging
contract, the assignment or modification
is treated as a termination with respect
to the issuer only if it results in a
deemed exchange of the hedge and a
realization event under section 1001 to
the issuer.
(B) General rule. A payment made or
received by an issuer to terminate a
qualified hedge, including loss or gain
realized or deemed realized, is treated as
a payment made or received on the
hedged bonds, as appropriate. The payment is reasonably allocated to the remaining periods originally covered by
the terminated hedge in a manner that
reflects the economic substance of the
hedge.
(C) Special rule for terminations
when bonds are redeemed. Except as
otherwise provided in this paragraph
(h)(3)(iv)(C)
and
in
paragraph
(h)(3)(iv)(D) of this section, when a
qualified hedge is deemed terminated
because the hedged bonds are redeemed,

the fair market value of the qualified
hedge on the redemption date is treated
as a termination payment made or received on that date. When hedged bonds
are redeemed, any payment received by
the issuer on termination of a hedge,
including a termination payment or a
deemed termination payment, reduces,
but not below zero, the interest payments made by the issuer on the hedged
bonds in the computation period ending
on the termination date. The remainder
of the payment, if any, is reasonably
allocated over the bond years in the
immediately preceding computation period or periods to the extent necessary
to eliminate the excess.
(D) Special rules for refundings. To
the extent that the hedged bonds are
redeemed using the proceeds of a refunding issue, the termination payment
is accounted for under paragraph
(h)(3)(iv)(B) of this section by treating
it as a payment on the refunding issue,
rather than the hedged bonds. In addition, to the extent that the refunding
issue is redeemed during the period to
which the termination payment has been
allocated to that issue, paragraph
(h)(3)(iv)(C) of this section applies to
the termination payment by treating it as
a payment on the redeemed refunding
issue.
(E) Safe harbor for allocation of certain termination payments. A payment to
terminate a qualified hedge does not
result in that hedge failing to satisfy the
applicable provisions of paragraph
(h)(3)(iv)(B) of this section if the payment is allocated in accordance with this
paragraph (h)(3)(iv)(E). For an issue that
is a variable yield issue after termination
of a qualified hedge, an amount must be
allocated to each date on which the
hedge provider’s payment, if any, would
have been made had the hedge not been
terminated. The amounts allocated to
each date must bear the same ratio to
the notional principal amount (within
the meaning of § 1.446–3) that would
have been used to compute the hedge
provider’s payment, if any, on that date,
and the sum of the present values of
those amounts must equal the present
value of the termination payment.
Present value is computed as of the day
the qualified hedge is terminated, using
the yield on the hedged bonds, determined without regard to the termination
payment. The yield used for this purpose is computed for the period beginning on the first date the qualified hedge
is in effect and ending on the date the
qualified hedge is terminated. On the

other hand, for an issue that is a fixed
yield issue after termination of a qualified hedge, the termination payment is
taken into account as a single payment
on the date it is paid.
(4) Certain variable yield bonds
treated as fixed yield bonds—(i) In general. Except as otherwise provided in
this paragraph (h)(4), if the issuer of
variable yield bonds enters into a qualified hedge, the hedged bonds are treated
as fixed yield bonds paying a fixed
interest rate if:
(A) Maturity. The term of the hedge
is equal to the entire period during
which the hedged bonds bear interest at
variable interest rates, and the issuer
does not reasonably expect that the
hedge will be terminated before the end
of that period.
(B) Payments closely correspond.
Payments to be received under the
hedge correspond closely in time to the
hedged portion of payments on the
hedged bonds. Hedge payments received
within 15 days of the related payments
on the hedged bonds generally so correspond.
(C) Aggregate payments fixed. Taking
into account all payments made and
received under the hedge and all payments on the hedged bonds (i.e., after
netting all payments), the issuer’s aggregate payments are fixed and determinable as of a date not later than 15 days
after the issue date of the hedged bonds.
Payments on bonds are treated as fixed
for purposes of this paragraph
(h)(4)(i)(C) if payments on the bonds
are based, in whole or in part, on one
interest rate, payments on the hedge are
based, in whole or in part, on a second
interest rate that is substantially the
same as, but not identical to, the first
interest rate and payments on the bonds
would be fixed if the two rates were
identical. Rates are treated as substantially the same if they are reasonably
expected to be substantially the same
throughout the term of the hedge. For
example, an objective 30-day taxexempt variable rate index or other
objective index may be substantially the
same as an issuer’s individual 30-day
interest rate.
(ii) Accounting. Except as otherwise
provided in this paragraph (h)(4)(ii), in
determining yield on the hedged bonds,
all the issuer’s payments on the hedged
bonds and all payments made and received on a hedge described in paragraph (h)(4)(i) of this section are taken
into account. If payments on the bonds
and payments on the hedge are based, in

12

whole or in part, on variable interest
rates that are substantially the same
within the meaning of paragraph
(h)(4)(i)(C) of this section (but not identical), yield on the issue is determined
by treating the variable interest rates as
identical. For example, if variable rate
bonds bearing interest at a weekly rate
equal to the rate necessary to remarket
the bonds at par are hedged with an
interest rate swap under which the issuer
receives payments based on a short-term
floating rate index that is substantially
the same as, but not identical to, the
weekly rate on the bonds, the interest
payments on the bonds are treated as
equal to the payments received by the
issuer under the swap for purposes of
computing the yield on the bonds.
(iii) Effect of termination—(A) In
general. Except as otherwise provided in
this paragraph (h)(4)(iii) and paragraph
(h)(5) of this section, the issue of which
the hedged bonds are a part is treated as
if it were reissued as of the termination
date of the qualified hedge covered by
paragraph (h)(4)(i) of this section in
determining yield on the hedged bonds
for purposes of § 1.148–3. The redemption price of the retired issue and the
issue price of the new issue equal the
aggregate values of all the bonds of the
issue on the termination date. In computing the yield on the new issue for
this purpose, any termination payment is
accounted for under paragraph (h)(3)(iv)
of this section, applied by treating the
termination payment as made or received on the new issue under this
paragraph (h)(4)(iii).
(B) Effect of early termination. Except as otherwise provided in this paragraph (h)(4)(iii), the general rules of
paragraph (h)(4)(i) of this section do not
apply in determining the yield on the
hedged bonds for purposes of § 1.148–3
if the hedge is terminated or deemed
terminated within 5 years after the issue
date of the issue of which the hedged
bonds are a part. Thus, the hedged
bonds are treated as variable yield bonds
for purposes of § 1.148–3 from the
issue date.
(C) Certain terminations disregarded.
This paragraph (h)(4)(iii) does not apply
to a termination if, based on the facts
and circumstances (e.g., taking into account both the termination and any
qualified hedge that immediately replaces the terminated hedge), there is no
change in the yield.
(5) Contracts entered into before issue date of hedged bond—(i) In general. A contract does not fail to be a

hedge under paragraph (h)(2)(i) of this
section solely because it is entered into
before the issue date of the hedged
bond. However, that contract must be
one to which either paragraph (h)(5)(ii)
or (h)(5)(iii) of this section applies.
(ii) Contracts expected to be closed
substantially contemporaneously with
the issue date of hedged bond—
(A) Application.
This
paragraph
(h)(5)(ii) applies to a contract if, on the
date the contract is identified, the issuer
reasonably expects to terminate or otherwise close (terminate) the contract substantially contemporaneously with the
issue date of the hedged bond.
(B) Contract terminated. If a contract
to which this paragraph (h)(5)(ii) applies
is terminated substantially contemporaneously with the issue date of the
hedged bond, the amount paid or received, or deemed to be paid or received, by the issuer in connection with
the issuance of the hedged bond to
terminate the contract is treated as an
adjustment to the issue price of the
hedged bond and as an adjustment to
the sale proceeds of the hedged bond for
purposes of section 148. Amounts paid
or received, or deemed to be paid or
received, before the issue date of the
hedged bond are treated as paid or
received on the issue date in an amount
equal to the future value of the payment
or receipt on that date. For this purpose,
future value is computed using yield on
the hedged bond without taking into
account amounts paid or received (or
deemed paid or received) on the contract.
(C) Contract not terminated. If a contract to which this paragraph (h)(5)(ii)
applies is not terminated substantially
contemporaneously with the issue date
of the hedged bond, the contract is
deemed terminated for its fair market
value as of the issue date of the hedged
bond. Once a contract has been deemed
terminated pursuant to this paragraph
(h)(5)(ii)(C), payments on and receipts
from the contract are no longer taken
into account under this paragraph (h) for
purposes of determining yield on the
hedged bond.
(D) Relation to other requirements of
a qualified hedge. Payments made in
connection with the issuance of a bond
to terminate a contract to which this
paragraph (h)(5)(ii) applies do not prevent the contract from satisfying the
requirements of paragraph (h)(2)(vi) of
this section.
(E) Fixed yield treatment. A bond
that is hedged with a contract to which

this paragraph (h)(5)(ii) applies does not
fail to be a fixed yield bond if, taking
into account payments on the contract
and the payments to be made on the
bond, the bond satisfies the definition of
fixed yield bond. See also paragraph
(h)(4) of this section.
(iii) Contracts expected not to be
closed substantially contemporaneously
with the issue date of hedged bond—
(A) Application.
This
paragraph
(h)(5)(iii) applies to a contract if, on the
date the contract is identified, the issuer
does not reasonably expect to terminate
the contract substantially contemporaneously with the issue date of the hedge
bond.
(B) Contract terminated. If a contract
to which this paragraph (h)(5)(iii) applies is terminated in connection with
the issuance of the hedged bond, the
amount paid or received, or deemed to
be paid or received, by the issuer to
terminate the contract is treated as an
adjustment to the issue price of the
hedged bond and as an adjustment to
the sale proceeds of the hedged bond for
purposes of section 148.
(C) Contract not terminated. If a contract to which this paragraph (h)(5)(iii)
applies is not terminated substantially
contemporaneously with the issue date
of the hedged bond, no payments with
respect to the hedge made by the issuer
before the issue date of the hedged bond
are taken into account under this section.
(iv) Identification. The identification
required under paragraph (h)(2)(viii) of
this section must specify the reasonably
expected governmental purpose, issue
price, maturity, and issue date of the
hedged bond, the manner in which interest is reasonably expected to be computed, and whether paragraph (h)(5)(ii)
or (h)(5)(iii) of this section applies to
the contract. If an issuer identifies a
contract under this paragraph (h)(5)(iv)
that would be a qualified hedge with
respect to the anticipated bond, but does
not issue the anticipated bond on the
identified issue date, the contract is
taken into account as a qualified hedge
of any bond of the issuer that is issued
for the identified governmental purpose
within a reasonable interval around the
identified issue date of the anticipated
bond.
(6) Authority of the Commissioner.
The Commissioner, by publication of a
revenue ruling or revenue procedure
(see § 601.601(d)(2) of this chapter),
may specify contracts that, although
they do not meet the requirements of

13

paragraph (h)(2) of this section, are
qualified hedges or, although they do
not meet the requirements of paragraph
(h)(4) of this section, cause the hedged
bonds to be treated as fixed yield bonds.
Par. 11. In § 1.148–5, paragraphs
(b)(2)(iii), (c)(2)(i), (c)(3)(ii), (d)(3)(ii),
(e)(2)(ii)(B) and (e)(2)(iii) are revised to
read as follows:
§ 1.148–5 Yield and valuation of investments.
*

*

*

*

*

(b) * * *
(2) * * *
(iii) Permissive application of single
investment rules to certain yield restricted investments for all purposes of
section 148. For all purposes of section
148, if an issuer reasonably expects as
of the issue date to establish and maintain a sinking fund solely to reduce the
yield on the investments in a refunding
escrow, then the issuer may treat all of
the yield restricted nonpurpose investments in the refunding escrow and that
sinking fund as a single investment
having a single yield, determined under
this paragraph (b)(2). Thus, an issuer
may not treat the nonpurpose investments in a reasonably required reserve
fund and a refunding escrow as a single
investment having a single yield under
this paragraph (b)(2)(iii).
*

*

*

*

*

(c) * * *
(2) Manner of payment—(i) In general. Except as otherwise provided in
paragraph (c)(2)(ii) of this section, an
amount is paid under this paragraph (c)
if it is paid to the United States at the
same time and in the same manner as
rebate amounts are required to be paid
or at such other time or in such manner
as the Commissioner may prescribe. For
example, yield reduction payments must
be made on or before the date of
required rebate installment payments as
described in §§ 1.148–3(f), (g), and (h).
The provisions of § 1.148–3(i) apply to
payments made under this paragraph (c).
*

*

*

*

*

(3) * * *
(ii) Exception to yield reduction payments rule for advance refunding issues.
Paragraph (c)(1) of this section does not
apply to investments allocable to gross
proceeds of an advance refunding issue,
other than—
(A) Transferred proceeds to which
paragraph (c)(3)(i)(C) of this section
applies;

(B) Replacement proceeds to which
paragraph (c)(3)(i)(F) of this section
applies; and
(C) Transferred proceeds to which
paragraph (c)(3)(i)(E) of this section
applies, but only to the extent necessary
to satisfy yield restriction under section
148(a) on those proceeds treating all
investments allocable to those proceeds
as a separate class.
(d) * * *
(3) * * *
(ii) Exception to fair market value
requirement for transferred proceeds allocations, universal cap allocations, and
commingled funds. Paragraph (d)(3)(i) of
this section does not apply if the investment is allocated from one issue to
another issue as a result of the transferred proceeds allocation rule under
§ 1.148–9(b) or the universal cap rule
under § 1.148–6(b)(2), provided that
both issues consist exclusively of taxexempt bonds. In addition, paragraph
(d)(3)(i) of this section does not apply
to investments in a commingled fund
(other than a bona fide debt service
fund) unless it is an investment being
initially deposited in or withdrawn from
a commingled fund described in
§ 1.148–6(e)(5)(iii).
*

*

*

*

*

(e) * * *
(2) * * *
(ii) * * *
(B) External commingled funds. A
widely held commingled fund in which
no investor in the fund owns more than
10 percent of the beneficial interest in
the fund. For purposes of this paragraph
(e)(2)(ii)(B), a fund is treated as widely
held only if, during the immediately
preceding fixed, semiannual period chosen by the fund (e.g., semiannual periods ending June 30 and December 31),
the fund had a daily average of more
than 15 investors that were not related
parties, and the daily average amount
each investor had invested in the fund
was not less than the lesser of $500,000
and 1 percent of the daily average of the
total amount invested in the fund. For
purposes of this paragraph (e)(2)(ii)(B),
an investor will be treated as owning
not more than 10 percent of the beneficial interest in the fund if, on the date of
each deposit by the investor into the
fund, the total amount the investor and
any related parties have on deposit in
the fund is not more than 10 percent of
the total amount that all investors have
on deposit in the fund. For purposes of
the preceding sentence, the total amount
that all investors have on deposit in the

fund is equal to the sum of all deposits
made by the investor and any related
parties on the date of those deposits and
the closing balance in the fund on the
day before those deposits. If any investor in the fund owns more than 10
percent of the beneficial interest in the
fund, the fund does not qualify under
this paragraph (e)(2)(ii)(B) until that
investor makes sufficient withdrawals
from the fund to reduce its beneficial
interest in the fund to 10 percent or less.
(iii) Special rule for guaranteed investment contracts. For a guaranteed
investment contract, a broker’s commission or similar fee paid on behalf of
either an issuer or the provider is treated
as an administrative cost and, except in
the case of an issue that satisfies section
148(f)(4)(D)(i), is a qualified administrative cost to the extent that the present
value of the commission, as of the date
the contract is allocated to the issue,
does not exceed the lesser of a reasonable amount within the meaning of
paragraph (e)(2)(i) of this section or the
present value of annual payments equal
to .05 percent of the weighted average
amount reasonably expected to be invested each year of the term of the
contract. For this purpose, present value
is computed using the taxable discount
rate used by the parties to compute the
commission or, if not readily ascertainable, the yield to the issuer on the
investment contract or other reasonable
taxable discount rate.
*

*

*

*

*

Par. 12. In § 1.148–6, paragraph
(d)(3)(iii)(C) is revised to read as follows:
§ 1.148–6 General allocation and accounting rules.
*

*

*

*

*

(d) * * *
(3) * * *
(iii) * * *
(C) Qualified endowment funds
treated as unavailable. For a 501(c)(3)
organization, a qualified endowment
fund is treated as unavailable. A fund is
a qualified endowment fund if—
(1) The fund is derived from gifts or
bequests, or the income thereon, that
were neither made nor reasonably expected to be used to pay working capital
expenditures;
(2) Pursuant to reasonable, established practices of the organization, the
governing body of the 501(c)(3) organization designates and consistently oper-

14

ates the fund as a permanent endowment
fund or quasi-endowment fund restricted
as to use; and
(3) There is an independent verification that the fund is reasonably necessary as part of the organization’s permanent capital.
*

*

*

*

*

Par. 13. In § 1.148–9, paragraphs
(c)(2)(ii)(B) and (h)(4)(vi) are revised to
read as follows:
§ 1.148–9 Arbitrage rules for refunding
issues.
*

*

*

*

*

(c) * * *
(2) * * *
(ii) * * *
(B) Permissive allocation of nonproceeds to earliest expenditures. Excluding amounts covered by paragraph
(c)(2)(ii)(A) of this section and subject
to any required earlier expenditure of
those amounts, any amounts in a mixed
escrow that are not proceeds of a refunding issue may be allocated to the
earliest maturing investments in the
mixed escrow, provided that those investments mature and the proceeds
thereof are expended before the date of
any expenditure from the mixed escrow
to pay any principal of the prior issue.
*

*

*

*

*

(h) * * *
(4) * * *
(vi) Exception for refundings of interim notes. Paragraph (h)(4)(v) of this
section need not be applied to refunding
bonds issued to provide permanent financing for one or more projects if the
prior issue had a term of less than 3
years and was sold in anticipation of
permanent financing, but only if the
aggregate term of all prior issues sold in
anticipation of permanent financing was
less than 3 years.
*

*

*

*

*

Par. 14. Section 1.148–10 is amended
as follows:
1. Paragraphs (b)(2), (c)(2)(viii) and
(c)(2)(ix) are revised.
2. Paragraph (c)(2)(x) is added.
3. Paragraph (e) is revised.
The revised and added provisions
read as follows:
§ 1.148–10 Anti-abuse rules and authority of Commissioner.
*

*

*

*

*

(b) * * *
(2) Application. The provisions of
this paragraph (b) only apply to the
portion of an issue that, as a result of
actions taken (or actions not taken) after

the issue date, overburdens the market
for tax-exempt bonds, except that for an
issue that is reasonably expected as of
the issue date to overburden the market,
those provisions apply to all of the gross
proceeds of the issue.
(c) * * *
(2) * * *
(viii) Replacement proceeds in a
sinking fund for the refunding issue;
(ix) Qualified guarantee fees for the
refunding issue or the prior issue; and
(x) Fees for a qualified hedge for the
refunding issue.
*

*

*

*

*

(e) Authority of the Commissioner to
clearly reflect the economic substance of
a transaction. If an issuer enters into a
transaction for a principal purpose of
obtaining a material financial advantage
based on the difference between taxexempt and taxable interest rates in a
manner that is inconsistent with the
purposes of section 148, the Commissioner may exercise the Commissioner’s
discretion to depart from the rules of
§ 1.148–1 through § 1.148–11 as necessary to clearly reflect the economic
substance of the transaction. For this
purpose, the Commissioner may recompute yield on an issue or on investments, reallocate payments and receipts
on investments, recompute the rebate
amount on an issue, treat a hedge as
either a qualified hedge or not a qualified hedge, or otherwise adjust any item
whatsoever bearing upon the investments and expenditures of gross proceeds of an issue. For example, if the
amount paid for a hedge is specifically
based on the amount of arbitrage earned
or expected to be earned on the hedged
bonds, a principal purpose of entering
into the contract is to obtain a material
financial advantage based on the difference between tax-exempt and taxable
interest rates in a manner that is inconsistent with the purposes of section 148.
*

*

*

*

*

Par. 15. Section 1.148–11 is amended
as follows:
1. Paragraphs (a), (b)(1), (c)(1), and
(g) are revised.
2. Paragraph (b)(3) is added.
3. Paragraphs (h) and (i) are removed.
The revised and added provisions
read as follows:
§ 1.148–11 Effective dates.
(a) In general. Except as otherwise
provided in this section, §§ 1.148–1

through 1.148–11 apply to bonds sold
on or after July 8, 1997.
(b) Elective retroactive application in
whole—(1) In general. Except as otherwise provided in this section, and subject to the applicable effective dates for
the corresponding statutory provisions,
an issuer may apply the provisions of
§§ 1.148–1 through 1.148–11 in whole,
but not in part, to any issue that is
outstanding on July 8, 1997, and is
subject to section 148(f) or to sections
103(c)(6) or 103A(i) of the Internal
Revenue Code of 1954, in lieu of otherwise applicable regulations under those
sections.
*

*

*

*

*

(3) No elective retroactive application
for hedges of fixed rate issues. The
provisions of § 1.148–4(h)(2)(i)(B) (relating to hedges of fixed rate issues)
may not be applied to any bond sold on
or before July 8, 1997.
(c) Elective retroactive application of
certain provisions and special rules—
(1) Retroactive application of overpayment recovery provisions. An issuer may
apply the provisions of § 1.148–3(i) to
any issue that is subject to section
148(f) or to sections 103(c)(6) or
103A(i) of the Internal Revenue Code of
1954.
*

*

*

*

*

(g) Provisions applicable to certain
bonds sold before effective date. Except
for bonds to which paragraph (b)(1) of
this section applies—
(1) Section 1.148–11A provides rules
applicable to bonds sold after June 6,
1994, and before July 8, 1997; and
(2) Sections
1.148–1
through
1.148–11 as in effect on July 1, 1993
(see 26 CFR part 1 as revised April 1,
1994), and § 1.148–11A(i) (relating to
elective retroactive application of certain
provisions) provide rules applicable to
certain issues issued before June 7,
1994.
Par. 16. In newly designated § 1.148–
11A, paragraph (i) is revised to read as
follows:
§ 1.148–11A Effective dates.
*

*

*

*

*

(i) Transition rules for certain
amendments—(1) In general. Section
1.103–8(a)(5), §§ 1.148–1, 1.148–2,
1.148–3, 1.148–4, 1.148–5, 1.148–6,
1.148–7, 1.148–8, 1.148–9, 1.148–10,
1.148–11, 1.149(d)–1, and 1.150–1 as in
effect on June 7, 1994 (see 26 CFR part
1 as revised April 1, 1997), and
§§ 1.148–1A through 1.148–11A,

15

1.149(d)–1A, and 1.150–1A apply, in
whole, but not in part—
(i) To bonds sold after June 6, 1994,
and before July 8, 1997;
(ii) To bonds issued before July 1,
1993, that are outstanding on June 7,
1994, if the first time the issuer applies
§§ 1.148–1 through 1.148–11 as in effect on June 7, 1994 (see 26 CFR part 1
as revised April 1, 1997), to the bonds
under § 1.148–11(b) or (c) is after June
6, 1994, and before July 8, 1997;
(iii) At the option of the issuer, to
bonds to which §§ 1.148–1 through
1.148–11, as in effect on July 1, 1993
(see 26 CFR part 1 as revised April 1,
1994), apply, if the bonds are outstanding on June 7, 1994, and the issuer
applies § 1.103–8(a)(5), §§ 1.148–1,
1.148–2, 1.148–3, 1.148–4, 1.148–5,
1.148–6, 1.148–7, 1.148–8, 1.148–9,
1.148–10, 1.148–11, 1.149(d)–1, and
1.150–1 as in effect on June 7, 1994
(see 26 CFR part 1 as revised April 1,
1997), and §§ 1.148–1A through 1.148–
11A, 1.149(d)–1A, and 1.150–1A to the
bonds before July 8, 1997.
(2) Special rule. For purposes of
paragraph (i)(1) of this section, any
reference to a particular paragraph of
§§ 1.148–1T, 1.148–2T, 1.148–3T,
1.148–4T, 1.148–5T, 1.148–6T, 1.148–
9T, 1.148–10T, 1.148–11T, 1.149(d)–1T,
or 1.150–1T shall be applied as a reference to the corresponding paragraph of
§§ 1.148–1A, 1.148–2A, 1.148–3A,
1.148–4A, 1.148–5A, 1.148–6A, 1.148–
9A, 1.148–10A, 1.148–11A, 1.149(d)–
1A, or 1.150–1A, respectively.
(3) Identification of certain hedges.
For any hedge entered into after June
18, 1993, and on or before June 6,
1994, that would be a qualified hedge
within the meaning of § 1.148–4(h)(2),
as in effect on June 7, 1994 (see 26
CFR part 1 as revised April 1, 1997),
except that the hedge does not meet the
requirements of § 1.148–4A(h)(2)(ix)
because the issuer failed to identify the
hedge not later than 3 days after which
the issuer and the provider entered into
the contract, the requirements of
§ 1.148–4A(h)(2)(ix) are treated as met
if the contract is identified by the actual
issuer on its books and records maintained for the hedged bonds not later
than July 8, 1997.
Par. 17. Section 1.149(d)–1 is
amended as follows:
1. Paragraph (f)(3) is revised.
2. Paragraph (g)(3) is added.

The revised and added provisions
read as follows:
§ 1.149(d)–1 Limitations on advance
refundings.
*

*

*

*

*

(f) * * *
(3) Application of savings test to multipurpose issues. Except as otherwise
provided in this paragraph (f)(3), the
multipurpose issue rules in § 1.148–9(h)
apply for purposes of the savings test. If
any separate issue in a multipurpose
issue increases the aggregate present
value debt service savings on the entire
multipurpose issue or reduces the
present value debt service losses on that
entire multipurpose issue, that separate
issue satisfies the savings test.
(g) * * *
(3) Special effective date for paragraph (f)(3). Paragraph (f)(3) of this
section applies to bonds sold on or after
July 8, 1997, and to any issue to which
the election described in § 1.148–
11(b)(1) is made. See § 1.148–11A(i)
for rules relating to certain bonds sold
before July 8, 1997.
§ 1.149(d)–1T
§ 1.149(d)–1A]

[Redesignated

as

Par. 18. Section 1.149(d)–1T is redesignated as § 1.149(d)–1A, is transferred
immediately following § 1.148–11A,
and the section heading is amended by
removing the language ‘‘(temporary)’’.
Par. 19. Section 1.150–1 is amended
as follows:
1. Paragraph (a)(2) is revised.
2. Paragraphs(c)(1) and (c)(4)(iii) are
revised.
3. Paragraph (c)(6) is added.
The revised and added provisions
read as follows:
§ 1.150–1 Definitions.
(a) * * *
(2) Effective date—(i) In general.
Except as otherwise provided in this
paragraph (a)(2), this section applies to
issues issued after June 30, 1993 to
which §§ 1.148–1 through 1.148–11 apply. In addition, this section (other than
paragraph (c)(3) of this section) applies
to any issue to which the election
described in § 1.148–11(b)(1) is made.
(ii) Special effective date for paragraphs (c)(1), (c)(4)(iii), and (c)(6).
Paragraphs (c)(1), (c)(4)(iii), and (c)(6)
of this section apply to bonds sold on or
after July 8, 1997, and to any issue to
which the election described in
§ 1.148–11(b)(1) is made. See § 1.148–

11A(i) for rules relating to certain bonds
sold before July 8, 1997.
*

*

*

*

*

(c) Definition of issue—(1) In general. Except as otherwise provided in
this paragraph (c), the term issue means
two or more bonds that meet all of the
following requirements:
(i) Sold at substantially the same
time. The bonds are sold at substantially
the same time. Bonds are treated as sold
at substantially the same time if they are
sold less than 15 days apart.
(ii) Sold pursuant to the same plan of
financing. The bonds are sold pursuant
to the same plan of financing. Factors
material to the plan of financing include
the purposes for the bonds and the
structure of the financing. For example,
generally—
(A) Bonds to finance a single facility
or related facilities are part of the same
plan of financing;
(B) Short-term bonds to finance
working capital expenditures and longterm bonds to finance capital projects
are not part of the same plan of financing; and
(C) Certificates of participation in a
lease and general obligation bonds secured by tax revenues are not part of the
same plan of financing.
(iii) Payable from same source of
funds. The bonds are reasonably expected to be paid from substantially the
same source of funds, determined without regard to guarantees from parties
unrelated to the obligor.
*

*

*

*

*

*

*

*

(6) Sale date. The sale date of a bond
is the first day on which there is a
binding contract in writing for the sale
or exchange of the bond.
*

*

*

*

*

§ 1.150–1T [Redesignated as § 1.150–
1A]
Par. 20. Section 1.150–1T is redesignated as § 1.150–1A, is transferred immediately following § 1.149(d)–1A, and

16

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 21. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 22. In § 602.101, paragraph (c)
is amended by adding an entry in numerical order to the table to read as
follows:
§ 602.101 OMB Control numbers.
*

*

*

*

*

(c) * * *
Current
CFR part or section where OMB
identified and described
control No.
*
*
*
*
*
1.150–1 . . . . . . . . . . . . . . . 1545–1347
*
*
*
*
*
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved May 1, 1997.
Donald C. Lubick,
Acting Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register on
May 8, 1997, 8:45 a.m., and published in the issue
of the Federal Register for May 9, 1997, 62 F.R.
25502)

*

(4) * * *
(iii) Certain general obligation
bonds. Except as otherwise provided in
paragraph (c)(2) of this section, bonds
that are secured by a pledge of the
issuer’s full faith and credit (or a substantially similar pledge) and sold and
issued on the same dates pursuant to a
single offering document may be treated
as part of the same issue if the issuer so
elects on or before the issue date.
*

the section heading is amended by removing the language ‘‘(temporary)’’.

Section 280G.—Golden Parachute
Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of June 1997. See
Rev. Rul. 97–24, page 17.

Section 382.—Limitation on Net
Operating Loss Carryforwards and
Certain Built-In Losses Following
Ownership Change
The adjusted federal long-term rate is set forth
for the month of June 1997. See Rev. Rul. 97–24,
page 17.

Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of June 1997. See Rev. Rul. 97–24, page
17.

Section 467.—Certain Payments
for the Use of Property or Services

Section 807.—Rules for Certain
Reserves

and other sections of the Code, tables
set forth the rates for June 1997.

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of June 1997. See Rev. Rul. 97–24, page
17.

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of June 1997. See Rev. Rul. 97–24, page
17.

Rev. Rul. 97–24

Section 846.—Discounted Unpaid
Losses Defined

Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of June 1997. See Rev. Rul. 97–24, page
17.

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of June 1997. See Rev. Rul. 97–24, page
17.

Section 1274.—Determination of
Issue Price in the Case of Certain
Debt Instruments Issued for
Property

Section 483.—Interest on Certain
Deferred Payments
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the
month of June 1997. See Rev. Rul. 97–24, page
17.

(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal
rates; adjusted federal long-term rate,
and the long-term exempt rate. For
purposes of section 1274, 1288, 382,

This revenue ruling provides various
prescribed rates for federal income tax
purposes for June 1997 (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)(2) for
buildings placed in service during the
current month. Finally, 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.

REV. RUL. 97–24 TABLE 1
Applicable Federal Rates (AFR) for June 1997
Period for Compounding
Annual
Short-Term
AFR
110% AFR
120% AFR
130% AFR

Semiannual

Quarterly

Monthly

6.23%
6.86%
7.51%
8.14%

6.14%
6.75%
7.37%
7.98%

6.09%
6.69%
7.30%
7.90%

6.06%
6.66%
7.26%
7.85%

6.80%
7.50%
8.19%
8.89%
10.29%
12.05%

6.69%
7.36%
8.03%
8.70%
10.04%
11.71%

6.63%
7.29%
7.95%
8.61%
9.92%
11.54%

6.60%
7.25%
7.90%
8.55%
9.84%
11.43%

7.11%
7.84%
8.57%
9.30%

6.99%
7.69%
8.39%
9.09%

6.93%
7.62%
8.30%
8.99%

6.89%
7.57%
8.25%
8.92%

Mid-Term
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR
Long-Term
AFR
110% AFR
120% AFR
130% AFR

17