Obligations of States & Political Subdivisions
DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR part 1 [TD 8941] RIN 1545-AX87
TITLE: Obligations of States and Political Subdivisions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains temporary regulations that provide
guidance to issuers of tax-exempt bonds for output facilities. This
document also contains final regulations that provide guidance to
certain nongovernmental persons that are engaged in the local
furnishing of electric energy or gas using facilities financed with
state or local government bonds. These regulations will affect
issuers of tax-exempt bonds and nongovernmental persons engaged in
the local furnishing of electric energy or gas after the effective
date. The text of the temporary regulations also serves as the text
of the proposed regulations set forth in the notice of proposed
rulemaking on this subject in the Proposed Rules section of this
issue of the Federal Register.
DATES: Effective Date: These regulations are effective January 19,
2001. Applicability Date: For dates of applicability, see
§§1.141-15T, 1.142(f)(4)-1(g), and 1.150-5(b)..2
FOR FURTHER INFORMATION CONTACT: Rose M. Weber (202) 622-3980 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in this rule has been reviewed and,
pending receipt and evaluation of public comments, approved by the
Office of Management and Budget (OMB) under 44 U.S.C. 3507 and
assigned control number 1545-1730. The collection of information in
this regulation is in §1.142(f)(4)-1. This information is
required to enable the IRS to identify persons engaged in the local
furnishing of electric energy or gas that use facilities financed
with exempt facility bonds under section 142(a)(8) and that expand
their service area in a manner inconsistent with the requirements of
sections 142(a)(8) and (f) who have made an election to ensure that
those bonds will continue to be treated as exempt facility bonds.
The data collected will be used by the IRS as the mechanism for
identifying bonds that will remain tax-exempt notwithstanding a
service area expansion that is inconsistent with the requirements of
sections 142(a)(8) and (f). The collection of information is
mandatory. The likely respondents are business institutions.
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: Desk Officer for the
DEPARTMENT OF THE TREASURY, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer,. W:CAR:MP:FP:S:O
Washington, DC 20224. Comments on the collection of information
should be received by March 19, 2001. Comments are specifically
requested concerning: Whether the collection of information is
necessary for the proper performance of the functions of the
Internal Revenue Service, including whether the information will
have practical utility;
The accuracy of the estimated burden associated with the collection
of information (see below); How the quality, utility, and clarity of
the information to be collected may be enhanced; How the burden of
complying with the collection of information may be minimized,
including through the application of automated collection techniques
or other forms of information technology; and Estimates of capital
or start-up costs and costs of operation, maintenance, and purchase
of services to provide information.
Estimated total annual reporting burden is 15 hours. Estimated
average annual burden hours per respondent is 1 hour.
Estimated number of respondents is 15.
Estimated annual frequency of responses is on occasion. An agency
may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless.4 it displays a valid control
number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.
Background
This document amends the Income Tax Regulations (26 CFR part 1)
under section 141 by providing special rules for tax-exempt bonds
issued for output facilities. This document also amends the Income
Tax Regulations under section 142(f)(4) by providing rules to make
the election provided in that section for nongovernmental persons
engaged in local furnishing of electric energy or gas using
facilities financed with tax-exempt bonds. On January 22, 1998,
temporary regulations (TD 8757) (the 1998 temporary regulations)
were published in the Federal Register (63 FR 3256) to provide
guidance under the Internal Revenue Code of 1986 regarding the
application of the private activity bond tests under section 141(b)
(1) and (2) to output contracts for output facilities; the
application of the $15 million limit under section 141(b)(4) to
output facility financings; the election provided in section 142(f)
(4) for nongovernmental persons engaged in local furnishing of
electric energy or gas using facilities financed with tax-exempt
bonds; and the filing location for certain notices and elections.
A.5 notice of proposed rulemaking (REG-110965-97) cross-referencing
the temporary regulations was published in the Federal Register on
the same day (63 FR 3296). On April 28, 1998, the IRS held a public
hearing on the proposed regulations. Written comments responding to
the notice of proposed rulemaking were also received. After
consideration of all the comments, the 1998 temporary regulations
are revised by this Treasury decision. The new temporary regulations
are referred to below as the The revisions are discussed below.
Explanation of Provisions
A. Section 1.141-7T Special Rules for Output Facilities
1. Benefits and burdens test - transmission contracts
Under the 1998 temporary regulations, an agreement to provide firm
or priority transmission services is generally treated as a take or
take or pay contract. Commentators suggested that firm or priority
transmission contracts should not automatically be treated as take
or take or pay contracts. They recommended that the same standards
that apply to determine whether generation contracts result in
private business use, including the requirements contract
provisions, should also apply to transmission contracts. The revised
regulations adopt this recommendation by deleting the provision that
generally treats all contracts for firm or priority transmission
service as take or take or pay contracts.
2. Retail requirements contracts.
The 1998 temporary regulations provide that a retail requirements
contract generally meets the benefits and burdens test to the extent
it obligates the purchaser to make payments that are not contingent
on the purchaser's output requirements. Commentators requested
clarification regarding the application of this rule to reasonable
contract damages and termination provisions. The revised regulations
clarify that a retail requirements contract does not meet the
benefits and burdens test by reason of (1) a provision that requires
the purchaser to pay reasonable and customary damages (including
liquidated damages) in the event of a default, or (2) a provision
that permits the purchaser to pay a specified amount to terminate
the contract while the purchaser has requirements, in each case if
the amount of the payment is reasonably related to the purchaser's
obligation to buy requirements that is discharged by the payment.
3. Output contract properly characterized as a lease
Under the 1998 temporary regulations, output contracts that provide
the purchaser with specific rights to control the output of a
facility or with other specific performance rights to the use of
output of the facility are generally taken into account under the
private business tests, even if the benefits and burdens test is not
met. Commentators requested clarification of the scope of this rule.
The revised regulations amend the rule and clarify its application
by specifying that an output contract that is properly characterized
as a lease for federal income tax purposes. Is tested under
§§1.141-3 and 1.141-4 to determine whether it is taken
into account under the private business tests.
4. Special rule for facilities with significant unutilized capacity
The 1998 temporary regulations provide that, if an issuer reasonably
expects on the issue date that persons that are treated as private
business users will purchase more than 30 percent of the actual
output of the facility, the Commissioner may determine the number of
units produced or to be produced by the facility in one year on a
reasonable basis other than by reference to nameplate capacity, such
as the average expected annual output of the facility. The revised
regulations change the 30 percent threshold to 20 percent.
5. Special rule for facilities with a limited source of supply
Under the 1998 temporary regulations, the available output of a
facility that is constrained by a limited source of supply must be
determined by reasonably taking those constraints into account.
Commentators requested clarification of the meaning of limited
source of supply. For example, they asked whether the term includes
not only physical but also economic limitations. The revised
regulations clarify that a limited source of supply includes a
physical limitation, such as the flow of water, but not an economic
limitation, such as the cost of coal or gas.
6. Measurement of private business use
The 1998 temporary regulations provide that, if an output contract
results in private business use, the amount of such use generally is
the capacity that must be reserved for the.8 nongovernmental person
under prudent reliability standards. Commentators stated that this
provision is difficult to apply and may overstate the amount of
private business use. They suggested that the amount of private
business use should be the amount of output actually purchased under
the contract. The revised regulations provide that, if an output
contract results in private business use, the amount of private
business use generally is the amount of output purchased under the
contract.
7. Exception for small purchases of output
The 1998 temporary regulations provide that output contracts are not
taken into account under the private business tests if the purchaser
is not required to make a substantially certain payment in any year
that is greater than 0.5 percent of the average annual debt service
on an issue that finances the facility. Some commentators suggested
that this provision should be amended to take into account average
annual payments under a contract, rather than payments in any one
year, and that the provision should apply based on all the
outstanding bonds for the facility. Other commentators stated that
the exception should be eliminated as inconsistent with a
competitive electric industry. The revised regulations provide that
output contracts are not taken into account under the private
business tests if the average annual payments under the contract
that are substantially certain to be made do not exceed 0.5 percent
of the average.9 annual debt service on all outstanding tax-exempt
bonds issued to finance the facility.
8. Exception for short-term sales of output
The 1998 temporary regulations provide that the exceptions for
short-term use that apply to other types of arrangements under the
general private activity bond rules in §1.141-3 also apply to
output contracts. Many commentators suggested that these exceptions
may have limited practical application in the output context and
recommended that they be expanded to permit contracts of a longer
duration. These commentators stated that longer-term contracts are
required in order to transfer substantial benefits of ownership and
substantial burdens of debt service with respect to an output
facility. Other commentators suggested that any sale of output by a
municipal utility outside of its traditional service territory
should result in private business use.
The revised regulations provide an exception under which an output
contract with a nongovernmental person will not be taken into
account under the private business tests if: (1) the term of the
contract, including all renewal options, does not exceed one year;
(2) the compensation under the contract is based on generally
applicable and uniformly applied rates or represents a negotiated,
fair market price; and (3) the facility is not financed for a
principal purpose of serving that nongovernmental person.
9. Special exception for sales of output attributable to
excess generating capacity resulting from open access.10 The 1998
temporary regulations contain an exception to private business use
for certain output contracts if: (1) the contract term does not
exceed three years; (2) the issuer does not utilize tax-exempt
financing to increase the generating capacity of its system during
the contract term; (3) the governmental owner offers non-
discriminatory, open access transmission tariffs under certain rules
of the Federal Energy Regulatory Commission (FERC) (or comparable
provisions of state law pursuant to a plan approved by the FERC);
(4) all of the output sold is attributable to excess capacity
resulting from the offer of the open access tariffs; (5) the
contract mitigates stranded costs attributable to the open access
tariffs; and (6) any stranded costs recovered by the governmental
owner are applied as promptly as is reasonably practical to redeem
tax-exempt bonds in a manner consistent with §1.141-12.
Comments were received regarding many of the above requirements. In
particular, many commentators suggested that the maximum contract
term should be extended beyond three years. Some commentators
recommended eliminating the prohibition on tax- exempt financing to
increase capacity during the contract term. Others suggested that de
minimis capacity increases should be permitted. Some commentators
suggested that the requirement that a contract mitigate stranded
costs should be eliminated because the purpose of that provision is
accomplished by the requirement that all of the output sold be
attributable to excess capacity from open access tariffs. Some
commentators recommended deleting.11 the reference to FERC approval
of state open access plans because the FERC may not approve all such
plans. Other commentators requested clarification regarding the
amounts that an issuer must use to redeem bonds. Finally, some
commentators recommended deleting the exception entirely.
The revised regulations retain the exception, with certain
modifications. First, the revised exception permits tax-exempt
financing during the contract term for property that does not
increase the generating capacity of the issuer's system by more than
three percent. Second, the amended exception deletes the reference
to FERC approval of state open access plans. Third, the revised
regulations remove the reference to stranded costs. Finally, the
revised exception clarifies that the amounts that an issuer must use
to redeem bonds consist of all payments that it receives under the
contract, other than the portion of such payments that is properly
allocable to the payment of ordinary and necessary expenses directly
attributable to the operation and maintenance of the facility (as
described in §1.141-4(c)(2)(C)).
10. Special exceptions for transmission facilities
The 1998 temporary regulations do not treat all use of transmission
facilities pursuant to standard tariffs as general public use, but
contain certain special exceptions to private business use of
transmission facilities. Some commentators suggested that use of
transmission facilities under standard tariffs should be treated as
general public use, and therefore should never result in private
business use. The revised.12 regulations do not treat all use of
transmission facilities pursuant to standard tariffs as general
public use, but retain and modify the special exceptions, as
discussed below.
The 1998 temporary regulations contain two special exceptions under
which certain actions with respect to transmission facilities
financed by an issue are not treated as deliberate actions under
§1.141-2(d). The first exception provides that the execution of
a contract for the use of transmission facilities is not treated as
a deliberate action if the contract is entered into in response to
or in anticipation of a specific order by the FERC to wheel power
under sections 211 and 212 of the Federal Power Act (16 U.S.C. 824j
and 824k) (or a state regulatory authority under comparable
provisions of state law pursuant to a plan approved by the FERC);
the terms of the contract are bona fide and arm's-length; and the
consideration paid is consistent with section 212(a) of the Federal
Power Act. Commentators suggested eliminating the requirement that
orders of state regulatory authorities be undertaken pursuant to a
FERC-approved state open access plan because FERC approval may not
be required for all such plans. The revised regulations adopt this
suggested change.
The second exception in the 1998 temporary regulations provides that
an action is not treated as a deliberate action if it is taken to
implement the offering of non-discriminatory, open access tariffs
for the use of financed transmission facilities in a manner
consistent with FERC rules, including the reciprocity.13 conditions
of FERC Order No. 888 (61 FR 21540, May 10, 1996). The exception
also applies to orders and rules of state regulatory authorities
pursuant to a plan approved by the FERC that are comparable to
certain FERC orders and rules. The exception does not apply,
however, to the sale, exchange, or other disposition of bond-
financed transmission facilities to a nongovernmental person.
Commentators recommended that the exception be expanded to apply to
open access tariffs that are offered under state law provisions that
are comparable to FERC rules, regardless of whether those provisions
are promulgated by a state regulatory authority or approved by the
FERC. The revised regulations adopt this suggested change.
Commentators also requested clarification regarding the
circumstances in which an independent system operator (ISO) may be
treated as a private business user of transmission facilities. Some
commentators suggested that the operation of transmission facilities
by an ISO is a quasi-governmental function and thus should never
constitute private business use. Some commentators requested
clarification of whether the existing rules for management contracts
under section 141 may be applied to arrangements for the operation
of transmission facilities by an ISO.
The revised regulations do not provide that the operation of bond-
financed transmission facilities by an ISO or other regional
transmission organization (RTO) is disregarded under section 141..14
However, the existing rules for management contracts under section
141, including Revenue Procedure 97-13 (1997-1 C.B. 632), are
applicable in determining whether an arrangement for the operation
of transmission facilities by an ISO or other RTO results in private
business use, including a determination of whether the arrangement
is properly characterized as a lease for federal income tax
purposes. Comments are requested on whether additional guidance is
needed concerning the treatment under section 141 of arrangements
for the operation of bond-financed transmission facilities by an ISO
or other RTO.
The 1998 temporary regulations provide a special transition rule for
bonds (other than advance refunding bonds) that refund bonds issued
prior to July 9, 1996 (the effective date of FERC Order No. 888).
Under this rule, an action taken or to be taken with respect to
transmission facilities is not taken into account under the
reasonable expectations test of §1.141-2(d) if the action is
described in one of the two special exceptions discussed above and
the weighted average maturity of the refunding bonds does not exceed
the remaining weighted average maturity of the prior bonds.
Commentators recommended that the July 9, 1996 date be changed to a
date on or after February 23, 1998 (the effective date of the 1998
temporary regulations). The revised regulations change the cut-off
date to February 23, 1998.
Under the 1998 temporary regulations, issuers may apply the special
exceptions for transmission facilities to any bonds.15 issued before
the effective date of those regulations. However, issuers may not
apply the exceptions to refunding bonds issued on or after the
effective date, unless the refunding bonds are subject to the 1998
temporary regulations in their entirety. Commentators suggested
that, in order to encourage open access, issuers should be permitted
to apply the exceptions to refunding bonds that are not otherwise
subject to the regulations. The revised regulations adopt this
change.
11. Definition of transmission facilities
The 1998 temporary regulations define transmission facilities to
include facilities that are necessary to provide ancillary services
required to be offered as part of open access transmission tariffs
under FERC rules. Commentators stated that the inclusion of
ancillary services within the general definition of transmission
facilities creates unwarranted complexity. They recommended that
facilities used for ancillary services be treated as transmission
facilities only for purposes of the special exceptions for
transmission facilities in the regulations. The revised regulations
adopt this approach.
B. Section 1.141-8T $15 Million Limitation for Output Facilities
Under the 1998 temporary regulations, property that replaces
existing property is treated as part of the same project as the
replaced property unless, among other things, the bonds that finance
the replaced property have a weighted average maturity that is not
greater than 120 percent of the reasonably expected economic life of
the replaced property.
One commentator noted that it is not common to allocate bonds that
finance output facilities to the specific assets that comprise those
facilities, and thus it may be difficult to determine whether this
120 percent requirement is met. The revised regulations amend this
rule so that it applies to the entire output facility of which the
replaced property is a part, rather than the specific asset being
replaced.
C. Need for Temporary Regulations and Request for Public Comments
Congress passed the Energy Policy Act of 1992 to encourage
restructuring of the electric power industry. Since that time, the
FERC and many states have adopted policies to open up access to
transmission facilities. Treasury and the IRS are aware that these
initiatives are causing rapid changes in the electric power
industry.
The 1998 temporary regulations were published in order to provide
immediate guidance under section 141 regarding the effect on the
tax-exempt status of bonds of certain restructuring transactions
necessary for utilities to participate in a restructured electric
utility industry. Treasury and the IRS are aware, however, that
restructuring efforts are evolving and uncertain, and that new types
of arrangements may be developed to implement restructuring.
Accordingly, the revised regulations are published in both temporary
and proposed form in order to continue to provide guidance on which
issuers can rely in evaluating their.17 participation in open access
regimes, while providing the opportunity for public comment with
respect to developments in the electric power industry that have
occurred since the publication of the 1998 temporary regulations.
The revised regulations are published in temporary form with the
expectation that the Treasury and the IRS will reexamine them in
light of new developments within the next three years.
Comments are invited on whether further guidance is needed to
address the new types of contractual arrangements that are arising
in the electric power industry. In particular, comments are invited
on whether additional guidance is needed to address the proper
treatment under section 141 of output contracts for the use of
transmission and distribution facilities under open access, and
output contracts for ancillary services that are necessary to
maintain the reliability of a transmission grid. Comments are also
requested on the impact of FERC Order No. 2000 (65 FR 810, January
6, 2000) on tax-exempt bonds issued by public power systems,
including whether additional guidance is needed regarding the proper
treatment under section 141 of arrangements for the operation of
bond-financed transmission facilities by an ISO or other RTO that
satisfies the requirements of Order 2000.
Effective Dates
Sections 1.141-7T and 1.141-8T are applicable to bonds sold on or
after January 19, 2001. Section 1.142(f)(4)-1 applies to elections
made on or after January 19, 2001. Section 1.150-5.18 applies to
notices and elections filed on or after January 19, 2001.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations.
It is hereby certified that the collection of information in these
regulations will not have a significant impact on a substantial
number of small entities. This certification is based upon the fact
that in the years 1987 through 1997 a total of only 80 different
state or local government issuers of exempt facility bonds issued
under section 142(f) for facilities for the local furnishing of
electric energy or gas filed information returns with the IRS under
section 149(e). Further, an election under section 142(f)(4) is in
no event required to be filed with the Internal Revenue Service more
than once. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Internal Revenue Code, these
temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal authors of these regulations are Bruce M. Serchuk, and
Rose M. Weber, Office of Chief Counsel (Tax-exempt and Government
Entities), Internal Revenue Service, and Stephen J. Watson, Office
of Tax Legislative Counsel, Department of the Treasury. However,
other personnel from the IRS and Treasury Department participated in
their development.
List of Subjects
26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements.
26 CFR Part 602 Reporting and recordkeeping requirements. Adoption
of Amendments to the Regulations Accordingly, 26 CFR part 1 is
amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.141-0 is amended by revising the entries for
§§1.141-7T, 1.141-8T and 1.141-15T to read as follows:
§1.141-0 Table of contents.
* * * * *
§1.141-7T Special rules for output facilities (temporary).
(a) Overview.
(b) Definitions.
(1) Available output.
(2) Measurement period.
(3) Sale at wholesale.
(4) Take contract and take or pay contract.
(5) Transmission facilities.
(6) Nonqualified amount..20 (c) Output contracts.
(1) General rule.
(2) Benefits and burdens test.
(3) Take contract or take or pay contract.
(4) Requirements contracts.
(5) Output contract properly characterized as a lease.
(d) Measurement of private business use.
(e) Measurement of private security or payment.
(f) Exceptions for certain contracts.
(1) Small purchases of output.
(2) Swapping and pooling arrangements.
(3) Short-term output contracts.
(4) Special 3-year exception for sales of output attributable to
excess generating capacity resulting from participation in open
access.
(5) Special exceptions for transmission facilities.
(6) Certain conduit parties disregarded.
(g) Allocations of output facilities and systems.
(1) Facts and circumstances analysis.
(2) Illustrations.
(3) Transmission contracts.
(4) Allocation of payments.
(h) Examples. §1.141-8T $15 million limitation for output
facilities (temporary).
(a) In general.
(1) General rule.
(2) Reduction in $15 million output limitation for outstanding
issues.
(3) Benefits and burdens test applicable.
(b) Definition of project.
(1) General rule.
(2) Separate ownership.
(3) Generating property.
(4) Transmission.
(5) Subsequent improvements.
(6) Replacement property.
(c) Examples.
* * * * *
§1.141-15T Effective dates (temporary).
(a) through (e) [Reserved].
(f) Effective dates for certain regulations relating to output
facilities.
(1) General rule.
(2) Transition rule for requirement contracts.
(3) Elective application of 1998 temporary regulations.
(g) Refunding bonds..21 (h) Permissive retroactive application.
(i) Permissive retroactive application of certain regulations
pertaining to output contracts.
* * * * *
Par. 3. Section 1.141-7T is revised to read as follows:
§1.141-7T Special rules for output facilities (temporary).
(a) Overview. This section provides special rules to determine
whether arrangements for the purchase of output from an output
facility cause an issue of bonds to meet the private business tests.
For this purpose, unless otherwise stated, water facilities are
treated as output facilities. Sections 1.141-3 and 1.141-4 generally
apply to determine whether other types of arrangements for use of an
output facility cause an issue to meet the private business tests.
(b) Definitions. For purposes of this section and §1.141- 8T,
the following definitions and rules apply: (1) Available output. The
available output of a facility financed by an issue is determined by
multiplying the number of units produced or to be produced by the
facility in one year by the number of years in the measurement
period of that facility for that issue.
(i) Generating facilities. The number of units produced or to be
produced by a generating facility in one year is determined by
reference to its nameplate capacity or the equivalent (or where
there is no nameplate capacity or the equivalent, its maximum
capacity), which is not reduced for reserves, maintenance or other
unutilized capacity..22 (ii) Transmission and other output
facilities--(A) In general. For transmission, cogeneration, and
other output facilities, available output must be measured in a
reasonable manner to reflect capacity.
(b) Electric transmission facilities. Measurement of the available
output of all or a portion of electric transmission facilities may
be determined in a manner consistent with the reporting rules and
requirements for transmission networks promulgated by the Federal
Energy Regulatory Commission (FERC). For example, for a transmission
network, the use of aggregate load and load share ratios in a manner
consistent with the requirements of the FERC may be reasonable. In
addition, depending on the facts and circumstances, measurement of
the available output of transmission facilities using thermal
capacity or transfer capacity may be reasonable.
(iii) Special rule for facilities with significant unutilized
capacity. If an issuer reasonably expects on the issue date that
persons that are treated as private business users will purchase
more than 20 percent of the actual output of the facility financed
with the issue, the Commissioner may determine the number of units
produced or to be produced by the facility in one year on a
reasonable basis other than by reference to nameplate capacity, such
as the average expected annual output of the facility. For example,
the Commissioner may determine the available output of a financed
peaking electric generating unit by reference to the reasonably
expected annual.23 output of that unit if the issuer reasonably
expects, on the issue date of bonds that finance the unit, that an
investor-owned utility will purchase more than 20 percent of the
actual output of the facility during the measurement period under a
take or pay contract, even if the amount of output purchased is less
than 10 percent of the available output determined by reference to
nameplate capacity. The reasonably expected annual output of the
generating facility must be consistent with the capacity reported
for prudent reliability purposes.
(iv) Special rule for facilities with a limited source of supply. If
a limited source of supply constrains the output of an output
facility, the number of units produced or to be produced by the
facility must be determined by reasonably taking into account those
constraints. For this purpose, a limited source of supply shall
include a physical limitation (for example, flow of water), but not
an economic limitation (for example, cost of coal or gas). For
example, the available output of a hydroelectric unit must be
determined by reference to the reasonably expected annual flow of
water through the unit.
(2) Measurement period. The measurement period of an output facility
financed by an issue is determined under §1.141-3(g).
(3) Sale at wholesale. For purposes of this section, a sale at
wholesale means a sale of output to any person for resale.
(4) Take contract and take or pay contract. A take contract is an
output contract under which a purchaser agrees to pay for.24 the
output under the contract if the output facility is capable of
providing the output. A take or pay contract is an output contract
under which a purchaser agrees to pay for the output under the
contract, whether or not the output facility is capable of providing
the output.
(5) Transmission facilities--
(i) In general. Transmission facilities are facilities for the
transmission or distribution of output.
(ii) Special rule for ancillary services. For purposes of paragraph
(f)(5), transmission facilities include facilities necessary to
provide ancillary services required to be offered as part of open
access transmission tariffs under rules promulgated by the FERC
under sections 205 and 206 of the Federal Power Act (16 U.S.C. 824d
and 824e). Thus, if a facility also serves another function (for
example, a facility that provides for operating reserves for
transmission and also provides generation) an allocable portion of
the facility is treated as a transmission facility for purposes of
paragraph (f)(5) of this section.
(6) Nonqualified amount. The nonqualified amount with respect to an
issue is determined under section 141(b)(8).
(c) Output contracts--(1) General rule. The purchase by a
nongovernmental person of available output of an output facility
(output contract) financed with the proceeds of an issue is taken
into account under the private business tests if the purchase has
the effect of transferring substantial benefits of owning the
facility and substantial burdens of paying the debt service on.25
bonds used (directly or indirectly) to finance the facility (the
benefits and burdens test). See paragraph (c)(5) of this section for
the treatment of an output contract that is properly characterized
as a lease for Federal income tax purposes. See paragraphs (d) and
(e) of this section for rules regarding measuring the use of, and
payments of debt service for, an output facility for determining
whether the private business tests are met. See also §1.141-8T
for rules for when an issue that finances an output facility (other
than a water facility) meets the private business tests because the
nonqualified amount of the issue exceeds $15 million.
(2) Benefits and burdens test--
(i) Benefits of ownership. An output contract transfers substantial
benefits of owning a facility if the contract gives the purchaser
(directly or indirectly) rights to capacity of the facility on a
basis that is preferential to the rights of the general public.
(ii) Burdens of paying debt service. An output contract transfers
substantial burdens of paying debt service on an issue to the extent
that the issuer reasonably expects that it is substantially certain
that payments will be made under the terms of the contract
(disregarding default, insolvency, or other similar circumstances).
For example, an output contract is treated as transferring burdens
of paying debt service on an issue if payments must be made upon
contract termination.
(iii) Payments pursuant to pledged contract. Payments made or to be
made under the terms of an output contract that is.26 pledged as
security for an issue are taken into account under the private
business tests even if the issuer reasonably expects that it is not
substantially certain that payments will be made under the contract
(disregarding default, insolvency, or other similar circumstances).
For this purpose, an output contract is pledged as security only if
the bond documents provide that the pledged contract cannot be
substantially amended without the consent of bondholders or a
trustee for the bondholders. This paragraph (c)(2)(iii) applies to
pledges made on or after February 23, 1998, with respect to bonds
that are subject to this section.
(3) Take contract or take or pay contract. The benefits and burdens
test is met if a nongovernmental person agrees pursuant to a take
contract or a take or pay contract to purchase available output of a
facility.
(4) Requirements contracts--
(i) In general. A requirements contract under which a
nongovernmental person agrees to purchase all or part of its output
requirements is taken into account under the private business tests
only to the extent that, based on all the facts and circumstances,
the contract meets the benefits and burdens test. See
§1.141-15T(f)(2) for special effective dates for the
application of this paragraph (c)(4) to issues financing facilities
subject to requirements contracts.
(ii) Significant factors. Significant factors that tend to establish
that the benefits and burdens test is met under the rule set forth
in paragraph (c)(4)(i) of this section include, but are not limited
to--.27
(A) The purchaser's customer base has significant indicators of
stability, such as large size, diverse composition, and a
substantial residential component;
(B) The contract covers historical requirements of the purchaser,
rather than only projected requirements that are in addition to
historical requirements; and
(C) The purchaser agrees not to construct or acquire other power
resources to meet the requirements covered by the contract.
(iii) Special rule for retail requirements contracts. In general, a
requirements contract that is not a sale at wholesale (a retail
requirements contract) does not meet the benefits and burdens test
because the obligation to make payments on the contract is
contingent on the output requirements of a single user. Such a
requirements contract in general meets the benefits and burdens
test, however, to the extent that it contains contractual terms that
obligate the purchaser to make payments that are not contingent on
the output requirements of the purchaser or that obligate the
purchaser to have output requirements. For example, a requirements
contract with an industrial purchaser meets the benefits and burdens
test if the purchaser enters into additional contractual obligations
with the issuer or another governmental unit not to cease
operations. A retail requirements contract does not meet the
benefits and burdens test by reason of a provision that requires the
purchaser to pay reasonable and customary damages (including
liquidated damages) in the event of a default, or a provision that
permits.28 the purchaser to pay a specified amount to terminate the
contract while the purchaser has requirements, in each case if the
amount of the payment is reasonably related to the purchaser's
obligation to buy requirements that is discharged by the payment.
(5) Output contract properly characterized as a lease.
Notwithstanding any other provision of this section, an output
contract that is properly characterized as a lease for Federal
income tax purposes shall be tested under the rules contained in
§§1.141-3 and 1.141-4 to determine whether it is taken
into account under the private business tests.
(d) Measurement of private business use. If an output contract
results in private business use under this section, the amount of
private business use generally is the amount of output purchased
under the contract.
(e) Measurement of private security or payment. The measurement of
payments made or to be made by nongovernmental persons under output
contracts as a percent of the debt service of an issue is determined
under the rules provided in §1.141-4.
(f) Exceptions for certain contracts--(1) Small purchases of output.
An output contract is not taken into account under the private
business tests if the average annual payments under the contract
that are substantially certain to be made under paragraph (c)(2)(ii)
of this section do not exceed 0.5 percent of the average annual debt
service on all outstanding tax-exempt bonds issued to finance the
facility, determined as of the effective date of the contract..29
(2) Swapping and pooling arrangements. An agreement that provides
for swapping or pooling of output by one or more governmental
persons and one or more nongovernmental persons does not result in
private business use of the output facility owned by the
governmental person to the extent that--
(i) The swapped output is reasonably expected to be approximately
equal in value (determined over periods of one year or less); and
(ii) The purpose of the agreement is to enable each of the parties
to satisfy different peak load demands, to accommodate temporary
outages, to diversify supply, or to enhance reliability in
accordance with prudent reliability standards.
(3) Short-term output contracts. An output contract with a
nongovernmental person is not taken into account under the private
business tests if--
(i) The term of the contract, including all renewal options, is not
longer than 1 year;
(ii) The contract either is a negotiated, arm's-length arrangement
that provides for compensation at fair market value, or is based on
generally applicable and uniformly applied rates; and
(iii) The output facility is not financed for a principal purpose of
providing that facility for use by that nongovernmental person.
(4) Special 3-year exception for sales of output attributable to
excess generating capacity resulting from.30 participation in open
access. The purchase of output of an electric generating facility by
a nongovernmental person is not treated as private business use if
all of the following requirements are met:
(i) The term of the contract is not longer than 3 years, including
all renewal options.
(ii) The issuer does not make expenditures to increase the
generating capacity of its system during the term of the contract
that are, or will be, financed with proceeds of tax-exempt bonds
(other than expenditures for property that does not increase the
generating capacity of the system by more than 3 percent).
(iii) The governmental owner offers non-discriminatory, open access
transmission tariffs for use of its transmission system pursuant to
rules promulgated by the FERC under sections 205 and 206 of the
Federal Power Act (16 U.S.C. 824d and 824e) (or comparable
provisions of state law).
(iv) All of the output sold under the contract is attributable to
excess capacity resulting from the offer of the non-discriminatory,
open access transmission tariffs referred to in paragraph (f)(5)
(iii) of this section.
(v) All payments received by the governmental owner under the
contract (other than the portion of such payments described in
§1.141-4(c)(2)(C)) are applied as promptly as is reasonably
practical to redeem tax-exempt bonds that financed the output
facility in a manner consistent with §1.141-12..31 (5) Special
exceptions for transmission facilities--
(i)Mandated wheeling. Entering into a contract for the use of
transmission facilities financed by an issue is not treated as a
deliberate action under §1.141-2(d) if--
(A) The contract is entered into in response to (or in anticipation
of) an order by the United States under sections 211 and 212 of the
Federal Power Act (16 U.S.C. 824j and 824k) (or a state regulatory
authority under comparable provisions of state law); and
(B) The terms of the contract are bona fide and arm's length, and
the consideration paid is consistent with the provisions of section
212(a) of the Federal Power Act.
(ii) Actions taken to implement non-discriminatory, open access. An
action is not treated as a deliberate action under §1.141-2(d)
if it is taken to implement the offering of non-discriminatory, open
access tariffs for the use of transmission facilities financed by an
issue in a manner consistent with rules promulgated by the FERC
under sections 205 and 206 of the Federal Power Act (16 U.S.C. 824d
and 824e) (or comparable provisions of state law). This paragraph
(f)(5)(ii) does not apply, however, to the sale, exchange, or other
disposition of transmission facilities to a nongovernmental person.
(iii) Application of reasonable expectations test to certain current
refunding bonds. An action taken or to be taken with respect to
transmission facilities refinanced by an issue is not.32 taken into
account under the reasonable expectations test of §1.141-2(d)
if--
(A) The action is described in paragraph (f)(5)(i) or (ii) of this
section;
(B) The bonds of the issue are current refunding bonds that,
directly or indirectly, refund bonds originally issued before
February 23, 1998; and
(C) The weighted average maturity of the refunding bonds is not
greater than the remaining weighted average maturity of those prior
bonds.
(6) Certain conduit parties disregarded. A nongovernmental person
acting solely as a conduit for the exchange of output among
governmentally owned and operated utilities is disregarded in
determining whether the private business tests are met with respect
to financed facilities owned by a governmental person. Use of
property by a power marketer in the trade or business of purchasing
and reselling power, however, is taken into account under the
private business tests.
(g) Allocations of output facilities and systems--(1) Facts and
circumstances analysis. Whether output sold under an output contract
is allocated to a particular facility (for example, a generating
unit), to the entire system of the seller of that output (net of any
uses of that system output allocated to a particular facility), or
to a portion of a facility is based on all the facts and
circumstances. Significant factors to be.33 considered in
determining the allocation of an output contract to financed
property are the following:
(i) The extent to which it is physically possible to deliver output
to or from a particular facility or system.
(ii) The terms of a contract relating to the delivery of output
(such as delivery limitations and options or obligations to deliver
power from additional sources).
(iii) Whether a contract is entered into as part of a common plan of
financing for a facility.
(iv) The method of pricing output under the contract, such as the
use of market rates rather than rates designed to pay debt service
of tax-exempt bonds used to finance a particular facility.
(2) Illustrations. The following illustrate the factors set forth in
paragraph (g)(1) of this section:
(i) Physical possibility. Output from a generating unit that is fed
directly into a low voltage distribution system of the owner of that
unit and that cannot physically leave that distribution system
generally must be allocated to those receiving electricity through
that distribution system. Output may be allocated without regard to
physical limitations, however, if exchange or similar agreements
provide output to a purchaser where, but for the exchange
agreements, it would not be possible for the seller to provide
output to that purchaser.
(ii) Contract terms relating to performance. A contract to provide a
specified amount of electricity from a system, but only.34 when at
least that amount of electricity is being generated by a particular
unit, is allocated to that unit. For example, a contract to buy 20
MW of system power with a right to take up to 40 percent of the
actual output of a specific 50 MW facility whenever total system
output is insufficient to meet all of the seller's obligations
generally is allocated to the specific facility rather than to the
system.
(iii) Common plan of financing. A contract entered into as part of a
common plan of financing for a facility generally is allocated to
the facility if debt service for the issue of bonds is reasonably
expected to be paid, directly or indirectly, from payments
substantially certain to be made under the contract (disregarding
default, insolvency, or other similar circumstances).
(iv) Pricing method. Pricing based on the capital and generating
costs of a particular turbine tends to indicate that output under
the contract is properly allocated to that turbine.
(3) Transmission contracts. Whether use under an output contract for
transmission is allocated to a particular facility or to a
transmission network is based on all the facts and circumstances, in
a manner similar to paragraphs (g)(1) and (2) of this section. In
general, the method used to determine payments under a contract is a
more significant contract term for this purpose than nominal
contract path. In general, if reasonable and consistently applied,
the determination of use of.35 transmission facilities under an
output contract may be based on a method used by third parties, such
as reliability councils.
(4) Allocation of payments. Payments for output provided by an
output facility financed with two or more sources of funding are
generally allocated under the rules in §1.141-4(c).
(h) Examples. The following examples illustrate the application of
this section: Example 1. Joint ownership. Z, an investor-owned
electric utility, and City H agree to construct an electric
generating facility of a size sufficient to take advantage of the
economies of scale. H will issue $50 million of its 24-year bonds,
and Z will use $100 million of its funds for construction of a
facility they will jointly own as tenants in common. Each of the
participants will share in the ownership, output, and operating
expenses of the facility in proportion to its contribution to the
cost of the facility, that is, one-third by H and two-thirds by Z.
H's bonds will be secured by H's ownership interest in the facility
and by revenues to be derived from its share of the annual output of
the facility. H will need only 50 percent of its share of the annual
output of the facility during the first 20 years of operations. It
agrees to sell 10 percent of its share of the annual output to Z for
a period of 20 years pursuant to a contract under which Z agrees to
take that power if available. The facility will begin operation, and
Z will begin to receive power, 4 years after the H bonds are issued.
The measurement period for the property financed by the issue is 20
years. H also will sell the remaining 40 percent of its share of the
annual output to numerous other private utilities under contracts of
one year or less that satisfy the exception under paragraph (f)(3)
of this section. No other contracts will be executed obligating any
person to purchase any specified amount of the power for any
specified period of time. No person (other than Z) will make
payments substantially certain to be made (disregarding default,
insolvency, or other similar circumstances) under paragraph (c)(2)
of this section that will result in a transfer of substantial
burdens of paying debt service on bonds used directly or indirectly
to provide H's share of the facilities. The bonds are not private
activity bonds, because H's one-third interest in the facility is
not treated as used by the other owners of the facility. Although 10
percent of H's share of the annual output of the facility will be
used in the trade or business of Z, a nongovernmental person, under
this section, that portion constitutes not more than 10 percent of
the available output of H's ownership interest in the facility..36
Example 2. Requirements contract treated as take contract.
(i) City J issues 20-year bonds to acquire an electric generating
facility having a reasonably expected economic life substantially
greater than 20 years and a nameplate capacity of 100 MW. The
available output of the facility under paragraph (b)(1) of this
section is approximately 17,520,000 MWh (100 MW X 24 hours X 365
days X 20 years). On the issue date, J enters into a contract with
T, an investor-owned utility, to provide T with all of its power
requirements for a period of 10 years, commencing on the issue date.
J reasonably expects that T will actually purchase an average of 30
MW over the 10-year period. Based on all of the facts and
circumstances, including the size, diversity, and composition of T's
customer base, J reasonably expects that it is substantially certain
(disregarding default, insolvency, or other similar circumstances)
that T will actually purchase only an average of 26 MW over the 10-
year period. The contract is a requirements contract that must be
taken into account under the private business tests pursuant to
paragraph (c)(4) of this section because it provides T with
substantial benefits of ownership (rights to capacity) and obligates
T with substantial burdens of making payments that the issuer
reasonably expects are substantially certain.
(ii) Under paragraph (d) of this section, the amount of reasonably
expected private business use under this contract is approximately
15 percent (30 MW X 24 hours X 365 days X 10 years, or 2,628,000
MWh) of the available output. Accordingly, the issue meets the
private business use test. J reasonably expects that the amount to
be paid for an average of 26 MW of power (less the operation and
maintenance costs directly attributable to generating that 26 MW of
power), will be more than 10 percent of debt service on the issue on
a present-value basis. The payment for 26 MW of power is an amount
that J reasonably expects is substantially certain to be made under
paragraph (c)(2) of this section. Accordingly, the issue meets the
private security or payment test because J reasonably expects that
it is substantially certain that payment of more than 10 percent of
the debt service will be indirectly derived from payments by T. The
bonds are private activity bonds under paragraph (c) of this
section. Further, if 15 percent of the sale proceeds of the issue is
greater than $15 million and the issue meets the private security or
payment test with respect to the $15 million output limitation, the
bonds are also private activity bonds under section 141(b)(4). See
§1.141-8T.
Example 3. Allocation of existing contracts to new facilities. Power
Authority K, a political subdivision created by the legislature in
State X to own and operate certain power generating facilities,
sells all of the power from its existing facilities to four private
utility systems under contracts executed in 1999, under which the
four systems are required to take or pay for specified portions of
the total power output.37 until the year 2029. Existing facilities
supply all of the present needs of the four utility systems, but
their future power requirements are expected to increase
substantially beyond the capacity of K's current generating system.
K issues 20-year bonds in 2004 to construct a large generating
facility. As part of the financing plan for the bonds, a fifth
private utility system contracts with K to take or pay for 15
percent of the available output of the new facility. The balance of
the output of the new facility will be available for sale as
required, but initially it is not anticipated that there will be any
need for that power. The revenues from the contract with the fifth
private utility system will be sufficient to pay less than 10
percent of the debt service on the bonds (determined on a present
value basis). The balance, which will exceed 10 percent of the debt
service on the bonds, will be paid from revenues derived from the
contracts with the four systems initially from sale of power
produced by the old facilities. The output contracts with all the
private utilities are allocated to K's entire generating system. See
paragraphs (g)(1) and (2) of this section. Thus, the bonds meet the
private business use test because more than 10 percent of the
proceeds will be used in the trade or business of a nongovernmental
person. In addition, the bonds meet the private security or payment
test because payment of more than 10 percent of the debt service,
pursuant to underlying arrangements, will be derived from payments
in respect of property used for a private business use.
Example 4. Allocation to displaced resource. Municipal utility MU, a
political subdivision, purchases all of the electricity required to
meet the needs of its customers (1,000 MW) from B, an investor-owned
utility that operates its own electric generating facilities, under
a 50-year take or pay contract. MU does not anticipate that it will
require additional electric resources, and any new resources would
produce electricity at a higher cost to MU than its cost under its
contract with B. Nevertheless, B encourages MU to construct a new
generating plant sufficient to meet MU's requirements. MU issues
obligations to construct facilities that will produce 1,000 MW of
electricity. MU, B, and I, another investor-owned utility, enter
into an agreement under which MU assigns to I its rights under MU's
take or pay contract with B. Under this arrangement, I will pay MU,
and MU will continue to pay B, for the 1,000 MW. I's payments to MU
will at least equal the amounts required to pay debt service on MU's
bonds. In addition, under paragraph (g)(1)(iii) of this section, the
contract among MU, B, and I is entered into as part of a common plan
of financing of the MU facilities. Under all the facts and
circumstances, MU's assignment to I of its rights under the original
take or pay contract is allocable to MU's new facilities under
paragraph (g) of this section. Because I is a nongovernmental
person, MU's bonds are private activity bonds..38 Example 5.
Transmission facilities transferred to regional transmission
organization.
(i) In 2001, the public utilities commission of State C adopts a
plan for restructuring its electric power industry. The plan fosters
competition by providing both wholesale and retail customers with
non-discriminatory access to transmission facilities within the
State. The plan provides that investor-owned utilities will transfer
operating control over all of their transmission assets to a
regional transmission organization (RTO), which is a nongovernmental
person that will operate those combined assets as a single, state-
wide system. Municipally-owned utilities are eligible for, but are
not required to participate in, the open access system implemented
by the RTO. The functions of the RTO include control of transmission
access and pricing, scheduling transmission, control area
operations, and settlements and billing. The RTO's compensation
under its operating agreement with transmission owners is based on a
share of net profits from operating the facilities. The
restructuring plan is approved by the FERC pursuant to sections 205
and 206 of the Federal Power Act.
(ii) In 1994, City D had issued bonds to finance improvements to its
transmission system. In 2001, D transfers operating control of its
transmission system to the RTO pursuant to the restructuring plan.
At the same time, D chooses to apply the private activity bond
regulations of §§1.141-1 through 1.141- 15 to the 1994
bonds. The operation of the financed facilities by the RTO results
in private business use under §1.141-3. Under the special
exception in paragraph (f)(5) of this section, however, the transfer
of control is not treated as a deliberate action. Accordingly, the
transfer of control does not cause the 1994 bonds to meet the
private activity bond tests.
Example 6. Current refunding. The facts are the same as in Example 5
of this paragraph (h), and in addition D issues bonds in 2003 to
currently refund the 1994 bonds. The weighted average maturity of
the 2003 bonds is not greater than the remaining weighted average
maturity of the 1994 bonds. D chooses to apply the private activity
bond regulations of §§1.141-1 through 1.141- 15 to the
refunding bonds. In general, reasonable expectations must be
separately tested on the date that refunding bonds are issued under
§1.141-2(d). Under the special exception in paragraph (f)(5) of
this section, however, the transfer of the financed facilities to
the RTO need not be taken into account in applying the reasonable
expectations test to the refunding bonds. Par. 4. Section 1.141-8T
is revised to read as follows: §1.141-8T $15 million limitation
for output facilities (temporary).
(a) In general--(1) General rule. Section 141(b)(4) provides a
special private activity bond limitation (the $15 million output
limitation) for issues 5 percent or more of the proceeds of which
are to be used to finance output facilities (other than a facility
for the furnishing of water). Under this rule, an issue consists of
private activity bonds under the private business tests of section
141(b)(1) and (2) if the nonqualified amount with respect to output
facilities financed by the proceeds of the issue exceeds $15
million. The $15 million output limitation applies in addition to
the private business tests of section 141(b)(1) and (2). Under
section 141(b)(4) and paragraph (a)(2) of this section, the $15
million output limitation is reduced in certain cases. Specifically,
an issue meets the test in section 141(b)(4) if both of the
following tests are met:
(i) More than $15 million of the proceeds of the issue to be used
with respect to an output facility are to be used for a private
business use. Investment proceeds are disregarded for this purpose
if they are not allocated disproportionately to the private business
use portion of the issue.
(ii) The payment of the principal of, or the interest on, more than
$15 million of the sales proceeds of the portion of the issue used
with respect to an output facility is (under the terms of the issue
or any underlying arrangement) directly or indirectly--.40
(A) Secured by any interest in an output facility used or to be used
for a private business use (or payments in respect of such an output
facility); or
(B) To be derived from payments (whether or not to the issuer) in
respect of an output facility used or to be used for a private
business use.
(2) Reduction in $15 million output limitation for outstanding
issues--
(i) General rule. In determining whether an issue 5 percent or more
of the proceeds of which are to be used with respect to an output
facility consists of private activity bonds under the $15 million
output limitation, the $15 million limitation on private business
use and private security or payments is applied by taking into
account the aggregate nonqualified amounts of any outstanding bonds
of other issues 5 percent or more of the proceeds of which are or
will be used with respect to that output facility or any other
output facility that is part of the same project.
(ii) Bonds taken into account. For purposes of this paragraph (a)
(2), in applying the $15 million output limitation to an issue (the
later issue), a tax-exempt bond of another issue (the earlier issue)
is taken into account if--
(A) That bond is outstanding on the issue date of the later issue;
(B) That bond will not be redeemed within 90 days of the issue date
of the later issue in connection with the refunding of that bond by
the later issue; and.41
(C) 5 percent or more of the sale proceeds of the earlier issue
financed an output facility that is part of the same project as the
output facility that is financed by 5 percent or more of the sale
proceeds of the later issue.
(3) Benefits and burdens test applicable--
(i) In general. In applying the $15 million output limitation, the
benefits and burdens test of §1.141-7T applies, except that
"$15 million" is substituted for "10 percent", or "5 percent" as
appropriate.
(ii) Earlier issues for the project. If bonds of an earlier issue
are outstanding and must be taken into account under paragraph (a)
(2) of this section, the nonqualified amount for that earlier issue
is multiplied by a fraction, the numerator of which is the adjusted
issue price of the earlier issue as of the issue date of the later
issue, and the denominator of which is the issue price of the
earlier issue. Pre-issuance accrued interest as defined in
§1.148-1(b) is disregarded for this purpose.
(b) Definition of project--(1) General rule. For purposes of
paragraph (a)(2) of this section, project has the meaning provided
in this paragraph. Facilities that are functionally related and
subordinate to a project are treated as part of that same project.
Facilities having different purposes or serving different customer
bases are not ordinarily part of the same project. For example, the
following are generally not part of the same project--
(i) Generation and transmission facilities;.42
(ii) Separate facilities designed to serve wholesale customers and
retail customers; and
(iii) A peaking unit and a baseload unit.
(2) Separate ownership. Except as otherwise provided in this
paragraph (b)(2), facilities that are not owned by the same person
are not part of the same project. If different governmental persons
act in concert to finance a project, however (for example as
participants in a joint powers authority), their interests are
aggregated with respect to that project to determine whether the $15
million output limitation is met. In the case of undivided ownership
interests in a single output facility, property that is not owned by
different persons is treated as separate projects only if the
separate interests are financed--
(i) With bonds of different issuers; and
(ii) Without a principal purpose of avoiding the limitation in this
section.
(3) Generating property--
(i) Property on same site. In the case of generation and related
facilities, project means property located at the same site.
(ii) Special rule for generating units. Separate generating units
are not part of the same project if one unit is reasonably expected,
on the issue date of each issue that finances the units, to be
placed in service more than 3 years before the other. Common
facilities or property that will be functionally related to more
than one generating unit must be allocated on a.43 reasonable basis.
If a generating unit already is constructed or is under construction
(the first unit) and bonds are to be issued to finance an additional
generating unit (the second unit), all costs for any common
facilities paid or incurred before the earlier of the issue date of
bonds to finance the second unit or the commencement of construction
of the second unit are allocated to the first unit. At the time that
bonds are issued to finance the second unit (or, if earlier, upon
commencement of construction of that unit), any remaining costs of
the common facilities may be allocated between the first and second
units so that in the aggregate the allocation is reasonable.
(4) Transmission. In the case of transmission facilities, project
means functionally related or contiguous property. Separate
transmission facilities are not part of the same project if one
facility is reasonably expected, on the issue date of each issue
that finances the facilities, to be placed in service more than 2
years before the other.
(5) Subsequent improvements--
(i) In general. An improvement to generating or transmission
facilities that is not part of the original design of those
facilities (the original project) is not part of the same project as
the original project if the construction, reconstruction, or
acquisition of that improvement commences more than 3 years after
the original project was placed in service and the bonds issued to
finance that improvement are issued more than 3 years after the
original project was placed in service.
(ii) Special rule for transmission facilities. An improvement to
transmission facilities that is not part of the original design of
that property is not part of the same project as the original
project if the issuer did not reasonably expect the need to make
that improvement when it commenced construction of the original
project and the construction, reconstruction, or acquisition of that
improvement is mandated by the federal government or a state
regulatory authority to accommodate requests for wheeling.
(6) Replacement property. For purposes of this section, property
that replaces existing property of an output facility is treated as
part of the same project as the replaced property unless--
(i) The need to replace the property was not reasonably expected on
the issue date or the need to replace the property occurred more
than 3 years before the issuer reasonably expected (determined on
the issue date of the bonds financing the property) that it would
need to replace the property; and
(ii) The bonds that finance (and refinance) the output facility have
a weighted average maturity that is not greater than 120 percent of
the reasonably expected economic life of the facility.
(c) Example. The application of the provisions of this section is
illustrated by the following example: Example.
(i) Power Authority K, a political subdivision, intends to issue a
single issue of tax-exempt bonds at par with a stated principal
amount and sale proceeds of $500 million to finance the acquisition
of an electric generating facility. No.45 portion of the facility
will be used for a private business use, except that L, an investor-
owned utility, will purchase 10 percent of the output of the
facility under a take contract and will pay 10 percent of the debt
service on the bonds. The nonqualified amount with respect to the
bonds is $50 million.
(ii) The maximum amount of tax-exempt bonds that may be issued for
the acquisition of an interest in the facility in paragraph (i) of
this Example is $465 million (that is, $450 million for the 90
percent of the facility that is governmentally owned and used plus a
nonqualified amount of $15 million). Par. 5. Section 1.141-15 is
amended by revising paragraphs (c), (d) and (e) to read as follows:
§1.141-15 Effective dates.
* * * * *
(c) Refunding bonds. Sections 1.141-1 through 1.141-6(a), 1.141-9
through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and the
definition of bond documents contained in §1.150-1(b) do not
apply to any bonds issued on or after May 16, 1997, to refund a bond
to which those sections do not apply unless--
(1) The refunding bonds are subject to section 1301 of the Tax
Reform Act of 1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity of the refunding bonds is
longer than--
(A) The weighted average maturity of the refunded bonds; or
(B) In the case of a short-term obligation that the issuer
reasonably expects to refund with a long-term financing (such as a
bond anticipation note), 120 percent of the weighted average
reasonably expected economic life of the facilities financed; or
(ii) A principal purpose for the issuance of the refunding bonds is
to make one or more new conduit loans..46 (d) Permissive application
of regulations. Except as provided in paragraph (e) of this section,
§§1.141-1 through 1.141-6(a), 1.141-9 through 1.141-14,
1.145-1 through 1.145-2, 1.150-1(a)(3) and the definition of bond
documents contained in §1.150-1(b) may be applied in whole, but
not in part, to actions taken before February 23, 1998, with respect
to--
(1) Bonds that are outstanding on May 16, 1997, and subject to
section 141; or
(2) Refunding bonds issued on or after May 16, 1997 that are subject
to section 141.
(e) Permissive application of certain sections. The following
sections may each be applied to any bonds--
(1) Section 1.141-3(b)(4);
(2) Section 1.141-3(b)(6); and
(3) Section 1.141-12.
Par. 6. Section 1.141-15T is revised to read as follows:
§1.141-15T Effective dates (temporary).
(a) through (e) [Reserved]. For further guidance see §1.141-15.
(f) Effective dates for certain regulations relating to output
facilities--(1) General rule. Except as otherwise provided in this
section, §§1.141-7T and 1.141-8T apply to bonds sold on or
after January 19, 2001, that are subject to section 1301 of the Tax
Reform Act of 1986 (100 Stat. 2602).
(2) Transition rule for requirements contracts. For bonds otherwise
subject to §§1.141-7T and 1.141-8T, §1.141-7T(c)
(4).47 applies to output contracts entered into on or after February
23, 1998. An output contract is treated as entered into on or after
that date if its term is extended, the parties to the contract
change, or other material terms are amended on or after that date.
For purposes of this paragraph (f)(2)--
(i) The extension of the term of a contract causes the contract to
be treated as entered into on the first day of the additional term;
(ii) The exercise by a party of a legally enforceable right that was
provided under a contract before February 23, 1998, on terms that
were fixed and determinable before such date, is not treated as an
amendment of the contract. For example, the exercise by a purchaser
after February 23, 1998 of a renewal option that was provided under
a contract before that date, on terms identical to the original
contract, is not treated as an amendment of the contract; and
(iii) An amendment that reduces the term of a contract, or the
amount of requirements covered by a contract, is not, in and of
itself, material.
(3) Elective application of 1998 temporary regulations. For an issue
sold on or after January 19, 2001, and before February 15, 2001, an
issuer may apply the provisions of §§1.141-7T and 1.141-8T
in effect prior to January 19, 2001 (26 CFR part 1, revised April 1,
2000) in whole, but not in part, in lieu of applying
§§1.141-7T and 1.141-8T.
(g) Refunding bonds in general. Except as otherwise provided in
paragraph (h) or (i) of this section, §§1.141-7T and
1.141-8T do not apply to any bonds sold on or after January 19,
2001, to refund a bond to which §§1.141-7T and 1.141-8T do
not apply unless--
(1) The refunding bonds are subject to section 1301 of the Tax
Reform Act of 1986 (100 Stat. 2602); and
(2)(i) The weighted average maturity of the refunding bonds is
longer than--
(A) The weighted average maturity of the refunded bonds; or
(B) In the case of a short-term obligation that the issuer
reasonably expects to refund with a long-term financing (such as a
bond anticipation note), 120 percent of the weighted average
reasonably expected economic life of the facilities financed; or
(ii) A principal purpose for the issuance of the refunding bonds is
to make one or more new conduit loans.
(h) Permissive retroactive application. Except as provided in
§1.141-15(d) or (e) or paragraph (i) of this section,
§§1.141- 1 through 1.141-6, 1.141-7T through 1.141-8T,
1.141-9 through 1.141-14, 1.145-1 through 1.145-2, 1.150-1(a)(3) and
the definition of bond documents contained in §1.150-1(b) may
be applied in whole, but not in part to--
(1) Outstanding bonds that are sold before January 19, 2001, and
subject to section 141; or
(2) Refunding bonds sold on or after January 19, 2001, that are
subject to section 141..49
(i) Permissive application of certain regulations pertaining to
output contracts. Section 1.141-7T(f)(4) and (5) may be applied to
any bonds. Par. 7. Section 1.142(f)(4)-1 is added to read as
follows: §1.142(f)(4)-1 Manner of making election to terminate
tax-exempt bond financing.
(a) Overview. Section 142(f)(4) permits a person engaged in the
local furnishing of electric energy or gas (a local furnisher) that
uses facilities financed with exempt facility bonds under section
142(a)(8) and that expands its service area in a manner inconsistent
with the requirements of sections 142(a)(8) and (f) to make an
election to ensure that those bonds will continue to be treated as
exempt facility bonds. The election must meet the requirements of
paragraphs (b) and (c) of this section.
(b) Time for making election--
(1) In general. An election under section 142(f)(4)(B) must be filed
with the Internal Revenue Service on or before 90 days after the
date of the service area expansion that causes bonds to cease to
meet the requirements of sections 142(a)(8) and (f).
(2) Date of service area expansion. For the purposes of this
section, the date of the service area expansion is the first date on
which the local furnisher is authorized to collect revenue for the
provision of service in the expanded area.
(c) Manner of making election. An election under section 142(f)(4)
(B) must be captioned "ELECTION TO TERMINATE TAX-EXEMPT.50 BOND
FINANCING", must be signed under penalties of perjury by a person
who has authority to sign on behalf of the local furnisher, and must
contain the following information--
(1) The name of the local furnisher;
(2) The tax identification number of the local furnisher;
(3) The complete address of the local furnisher;
(4) The date of the service area expansion;
(5) Identification of each bond issue subject to the election,
including the complete name of each issue, the tax identification
number of each issuer, the report number of the information return
filed under section 149(e) for each issue, the issue date of each
issue, the CUSIP number (if any) of the bond with the latest
maturity of each issue, the issue price of each issue, the adjusted
issue price of each issue as of the date of the election, the
earliest date on which the bonds of each issue may be redeemed, and
the principal amount of bonds of each issue to be redeemed on the
earliest redemption date;
(6) A statement that the local furnisher making the election agrees
to the conditions stated in section 142(f)(4)(B); and
(7) A statement that each issuer of the bonds subject to the
election has received written notice of the election.
(d) Effect on section 150(b). Except as provided in paragraph (e) of
this section, if a local furnisher files an election within the
period specified in paragraph (b) of this section, section 150(b)
does not apply to bonds identified in the election during and after
that period..51
(e) Effect of failure to meet agreements. If a local furnisher fails
to meet any of the conditions stated in an election pursuant to
paragraph (c)(6) of this section, the election is invalid.
(f) Corresponding provisions of the Internal Revenue Code of 1954.
Section 103(b)(4)(E) of the Internal Revenue Code of 1954 set forth
corresponding requirements for the exclusion from gross income of
the interest on bonds issued for facilities for the local furnishing
of electric energy or gas. For the purposes of this section any
reference to sections 142(a)(8) and (f) of the Internal Revenue Code
of 1986 includes a reference to the corresponding portion of section
103(b)(4)(E) of the Internal Revenue Code of 1954.
(g) Effective dates. This section applies to elections made on or
after January 19, 2001. §1.142(f)(4)-1T [Removed] Par. 8.
Section 1.142(f)(4)-1T is removed..52 Par. 9. Section 1.150-5 is
added to read as follows: §1.150-5 Filing notices and
elections.
(a) In general. Notices and elections under the following sections
must be filed with the Internal Revenue Service, 1111 Constitution
Avenue, NW, Attention: T:GE:TEB:O, Washington, DC 20224 or such
other place designated by publication of a notice in the Internal
Revenue Bulletin--
(1) Section 1.141-12(d)(3);
(2) Section 1.142(f)(4)-1; and
(3) Section 1.142-2(c)(2).
(b) Effective dates. This section applies to notices and elections
filed on or after January 19, 2001. §1.150-5T [Removed] Par.
10. Section 1.150 B
5T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par.
11. The authority for part 602 continues to read as follows:
Authority: 26 U.S.C. 7805..53 Par. 12 . In §602.101, paragraph
(b) is amended by adding an entry in numerical order to the table to
read as follows: §602.101 OMB Control numbers.
* * * * *
(b) * * *
CFR part or section where Current OMB identified and described
control No.
________________________________________________________________
* * * * *
1.142(f)(4)-1............................1545-1730
* * * * *
Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved: January 10, 2001
Jonathan Talisman
Assistant Secretary of the Treasury
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