SECTION 5. REQUEST FOR

COMMENTS

Before any notice of proposed rulemaking is issued with respect to the guidance provided in this notice, consideration will be given to any written public comments on this notice that are submitted. In addition, the Treasury Department and the IRS specifically request comments regarding provisions of the regulations under § 148 that may impede an issuer’s ability to obtain credit enhancement and how those provisions should

and investment earnings thereon. In addition, the arbitrage restrictions apply to a special type of tax-exempt bond proceeds, known as “replacement proceeds,” as a result of their use as security for tax-exempt bonds or other nexus to tax-exempt bonds. These special replacement proceeds include, among other things, certain “pledged funds” that are pledged to secure repayment of tax-exempt bonds with a reasonable assurance of availability for such purpose. One special exception to the treatment of pledged funds as replacement proceeds covers certain perpetual trust funds under certain parameters and under a specified size limitation, as described further herein.

In particular, § 148(a) defines an arbitrage bond as any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly (1) to acquire higher yielding investments or (2) to replace funds which were used directly or indirectly to acquire higher yielding investments. Section 148(a) further provides that a bond is an arbitrage bond if an issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part to acquire higher yielding investments or to replace funds which were used directly or indirectly to acquire higher yielding investments. In addition, § 148(f) requires that issuers rebate certain excess earnings on proceeds of tax-exempt bonds to the Federal Government. Under §§ 1.148–2(a) and 1.148–3(a) of the Income Tax Regulations, “proceeds” for these purposes means “gross proceeds”. Section 1.148–1(b) defines “gross proceeds” to include proceeds and replacement proceeds of an issue.

Section 1.148–1(c)(1) defines “replacement proceeds” as amounts that have a sufficiently direct nexus to a tax-exempt bond issue or to the governmental purpose of a tax-exempt bond issue to conclude that the amounts would have been used for that governmental purpose if the proceeds of the bond issue were not used or to be used for that governmental purpose. Section 1.148–1(c)(1) further provides that replacement proceeds include, but are not limited to, sinking funds, pledged funds, and other replacement proceeds described in § 1.148–1(c)(4) to the extent that those funds or amounts are held by or derived from a substantial beneficiary of the issue.

Section 1.148–1(c)(1) defines a substantial beneficiary of an issue to include the issuer of such issue, any related party to the issuer and, if the issuer is not a State, the State in which the issuer is located. Section 1.148–1(c) further provides, however, that a person is not a substantial beneficiary of an issue solely because it is a guarantor under a qualified guarantee.

Section 1.148–1(c)(3)(i) defines a “pledged fund” as any amount that is directly or indirectly pledged to pay principal or interest on the issue. Although a pledge need not be cast in any particular form, it must, in substance provide reasonable assurance that the amount will be available to pay principal or interest on the issue even if the issuer encounter financial difficulties.

Section §1.148–11(d)(1) provides a special exception to the treatment of funds as pledged funds for arbitrage purposes for certain perpetual trust funds if the requirements and limitations enumerated in §§ 1.148–11(d)(1)(i) through (vi) are satisfied. Specifically, § 1.148–11(d)(1) provides that a guarantee by a fund created and controlled by a State and established pursuant to such State’s constitution does not cause the amounts in such fund to be pledged funds treated as replacement proceeds for purposes of § 148 if: (i) substantially all of the corpus of the fund consists of nonfinancial assets, revenues derived from these assets, gifts, and bequests, (ii) the fund corpus may be invaded only to support specifically designated essential governmental functions (the “designated functions”) carried on by a political subdivision with general taxing powers; (iii) substantially all of the available income of the fund is required to be applied annually to support the designated functions; (iv) the issue of bonds guaranteed consists of general obligation bonds that are not private activity bonds substantially all of the proceeds of which are to be used for the designated functions; (v) the fund satisfied all of requirements in §§ 1.148–11(d)(1)(i) through (iii) on August 16, 1986; and (vi) the guarantee is not attributable to a deposit to the fund after May 14, 1989, unless the deposit is attributable to the sale or other disposition of fund assets or unless prior to the deposit, the outstanding amount of the bonds guaranteed by the fund did not exceed 250 percent of the

January 11, 2010 257 2010–2 I.R.B.

Office of the Chief Counsel (Financial Institutions and Products). However, other personnel from the IRS and the Treasury Department participated in its development. For further information regarding this notice, contact Johanna Som de Cerff at (202) 622–3980 (not a toll-free call).

be amended. Comments should be submitted in writing and can be emailed to notice.comments@irscounsel.treas.gov (include “Notice 2010–5” in the subject line) or mailed to Office of Associate Chief Counsel (Financial Institutions and Products), Re: Notice 2010–5, CC:FIP:B5, Room 3547, 1111

26 CFR 601.201: Rulings and determination letters.

Rev. Proc. 2010–9

Constitution Avenue, NW, Washington, DC 20224. Comments that are submitted will be made available to the public.