SECTION 12. ARBITRAGE

REQUIREMENTS

Section 54(i) generally requires that an issue of CREBs must satisfy the arbitrage investment restrictions under section 148 applicable to tax-exempt bonds with respect to proceeds of the issue. In general, under section 148, subject to various specific prompt spending exceptions and other exceptions, the arbitrage investment restrictions, including the yield restrictions and the arbitrage rebate requirement, apply broadly to gross proceeds of tax-exempt bonds. The Treasury Department and the IRS expect that, except as otherwise provided in this section 12, the arbitrage investment restrictions under section 148 and § 1.148–1 to § 1.148–11, inclusive, and the exceptions to those restrictions will apply to gross proceeds of CREBs to the same extent and in the same manner as they apply to gross proceeds of tax-exempt state or local governmental bonds the interest on which is excludable from gross income under section 103.

The Treasury Department and the IRS further expect that, in applying the arbitrage investment restrictions under section 148 to CREBs, the modifications to the general rules described in paragraphs a. through e. of this section 12, below, will apply.

a. Cooperative electric companies treated like state or local governmen- tal entities . Cooperative electric companies under section 54(j)(1) will be treated as “governmental persons” under § 1.141–1(b) for purposes of (1) applying the arbitrage investment restrictions under section 148, including the program

investment definition under § 1.148–1(b), and (2) determining whether CREBs are private activity bonds under section 141 in applying any particular arbitrage investment restriction that depends on whether bonds are private activity bonds,

b. 5-year temporary period exception to arbitrage yield restriction . If an issue of CREBs meets the spending requirements of section 54(h)(1), then the proceeds of the issue of CREBs will be treated as qualifying for a 5-year temporary period exception to arbitrage yield restriction under § 1.148–2(e)(2) beginning on issue date of the issue.

c. CREB credit disregarded in deter- mining CREB yield for arbitrage pur- poses . In determining the yield on an issue of CREBs for arbitrage purposes under § 1.148–4, the CREBs credit allowed under section 54(a) and the credit rate under section 54(b)(2)(A) will be disregarded.

d. Non-AMT tax-exempt bond invest- ment exception inapplicable . In applying the arbitrage restrictions against investing gross proceeds of an issue of CREBs in higher yielding investments under section 148(a) and § 1.148–2, the exception to arbitrage yield restriction for investments of gross proceeds of tax-exempt bonds in specified non-AMT tax-exempt bond investments under section 148(b)(3) (relating to an exception to the definition of “investment property” for specified non-AMT tax-exempt bonds) and § 1.148–2(d)(2)(v) (relating to a corresponding exception to arbitrage yield limitations) will be inapplicable.

e. Application of small issuer exception to the arbitrage rebate requirement . In determining whether an issue of CREBs qualifies for the $5 million small issuer exception to the arbitrage rebate requirement (increased to $10 million for certain public school facilities) under section 148(f)(4)(D) and § 1.148–8, both CREBs and tax-exempt bonds the interest on which is excludable from gross income under section 103 (other than private activity bonds) that are reasonably expected to be issued or actually issued by the CREB issuer (and other applicable on-behalf-of entities and subordinate entities taken into account under that section) within a calendar year will be taken into account in measuring the applicable size limitation.

April 2, 2007 874 2007–14 I.R.B.

contact Tina Hill at (202) 283–9774 (not a toll-free call).