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APPA Recommends Changes to Proposed Private Activity Bond Regs

JAN. 2, 2007

APPA Recommends Changes to Proposed Private Activity Bond Regs

DATED JAN. 2, 2007
DOCUMENT ATTRIBUTES

 

January 2, 2007

 

 

Internal Revenue Service

 

CC:PA:LPD:PR (REG-140379-02; REG-142599-02)

 

Room 5203

 

PO Box 7604

 

Ben Franklin Station

 

Washington, DC 20044

 

Re: Comments on Proposed Allocation and Accounting Regulations Under Code Section 141 of the Internal Revenue Code

 

Dear Commissioner:

On October 30, 2006, the Internal Revenue Service (the "IRS") issued proposed allocation and accounting regulations (the "Proposed Regulations") regarding allocation of, and accounting for, tax-exempt bond proceeds for purposes of the private activity bond restrictions under Section 141 of the Internal Revenue Code of 1986 (the "Code"). The American Public Power Association (the "APPA") appreciates the efforts of the IRS and the Treasury Department to address this issue and is pleased to provide comments on the Proposed Regulations.

 

Introduction

 

The APPA is the national service organization representing the interests of the nation's approximately two thousand municipal and other state and local government-owned utilities ("public power systems") throughout the United States. Public power systems serve nearly 15 percent of all ultimate electric customers. By way of comparison, there are approximately 240 investor-owned utilities in the United States that collectively serve 74 percent of all ultimate electric customers in the United States. Eleven percent of electric customers are served by rural electric cooperatives. Finally, several large federally owned utilities generate and transmit a significant portion of the nation's electric supply to public power systems and rural electric cooperatives, as well as to a few large industrial customers.

Public power systems include state agencies, municipal departments, public utility districts and irrigation districts. Municipal governments own the majority of public power systems. Public power systems serve some of the largest cities in the United States, such as Los Angeles, Sacramento, Seattle, Tacoma, San Antonio, Jacksonville and Orlando. However, the majority of public power systems are located in small and medium sized communities in every state except Hawaii.

All of the members of the Large Public Power Council ("LPPC") are also members of APPA. LPPC has submitted separate comments with respect to the Proposed Regulations, and APPA is generally supportive of those comments.

 

Background

1986 Tax Act1

 

There is a strong need for guidance with respect to the ability of public power systems to allocate tax-exempt bond proceeds to mixed-use output facilities. This need is generated by the following factors. First, the 1986 Tax Act materially decreased the permitted amount of private use from 25% to 10% and introduced a separate $15 million "per-project" private use limit for output facilities. Second, in response to federal initiatives promoting competition in the electric industry and the resulting economic pressure of competing with investor-owned utilities, public power systems require the tools and flexibility to operate in a market-based, competitive environment. To ensure that tax policy does not unduly frustrate existing energy policy, the IRS can and should provide public power systems with significant flexibility.

 

Regulatory Initiatives

 

The subject of mixed-use facilities was first addressed in proposed private activity regulations released on December 30, 1994 (the "1994 Proposed Regulations"). Generally, the 1994 Proposed Regulations only permitted tax-exempt financing of mixed-use facilities if the private use was within a discrete portion of the facility. "With respect to output facilities, the regulations permitted the financing of jointly owned facilities (i.e., ownership by an investor-owned utility and a governmental unit) as tenants in common, however, the regulations provided no guidance regarding mixed-use facilities wholly-owned by governmental units. In the final private activity bond regulations released on January 16,1997, the subject of mixed-use facilities was reserved.

On September 20, 2002, the IRS issued an advance notice of proposed rulemaking (the " ANPR") regarding the ability to allocate proceeds of tax-exempt bonds to the governmental use portion of output facilities used for both a governmental and private business use. The APPA appreciates the ability to rely on the ANPR until final allocation and accounting regulations are published.

The APPA applauds the efforts of the IRS and the Treasury Department to address the allocation of proceeds for mixed-use facilities. We strongly support the general policy adopted by the Proposed Regulations which provides that private use is first allocated to the portion of the facility financed with equity.

  •  

    Executive Summary

  • The Proposed Regulations provide that proceeds of tax-exempt bonds and other funds applied to finance capital expenditures for a mixed-use project are generally allocated ratably unless an issuer makes a timely election to use either the discrete portion method or the undivided portion method. We believe that the requirement for such an election introduces unneeded complexity and should be reconsidered. If an election requirement is retained, we strongly suggest that final regulations provide that the election can be made at any time by the issuer. As an alternative to the above, at a minimum, any election requirement should not be required any earlier than as otherwise provided in Treasury Regulation Section 1.148-6(d)(1)(iii) (i.e., not later than 18 months after the later of, the date that the expenditure is paid or the date that the project is placed in service).

  • The Proposed Regulations provide (in part) that an issuer may elect to apply the undivided portion allocation method to a mixed-use output facility that has multiple undivided ownership interests which are owned by governmental persons or private businesses, provided that all owners of the undivided interest share ownership, output and operating expenses in proportion to their contribution to the costs of the output facility. In the case of jointly owned output facilities, the requirement that such parties share ownership, output and operating expenses in proportion to their contribution to the costs of the output facility will be problematic in a range of financings. We fail to see a compelling tax policy reason why such parties must share ownership, output and operating expenses in proportion to their cost contribution provided that the private party does not improperly benefit from the tax-exempt bond financed portion of the facility. We request that this provision be deleted.

  • The Proposed Regulations allow an issuer to elect to use the undivided portion allocation method provided that such allocations generally represent "fixed percentages" of the use of the entire mixed-use project. It is not clear under the Proposed Regulations whether the "fixed percentage" means that the amount of private use must be fixed or whether the equity portion of the mixed-use project must be fixed. We believe that the rule should be clarified to provide that the fixed percentage refers to the percentage of the mixed-used project financed with equity.

  • The Proposed Regulations provide that the percentage of private business use of the mixed-use project (as determined under the measurement period rules) for any "one year period" that is allocated to an undivided portion financed with equity cannot exceed the percentage of capital expenditures of the mixed-use project used to determine such undivided portion. In lieu of a fixed annual private use limitation (plus any permissible de minimis amount), we request that any excess equity (i.e., equity in excess of private use) be permitted to be allocated to private use in future years.

  • The anticipatory remedial action rules in the Proposed Regulations introduce a complicated and restrictive regime that significantly limits the effectiveness of this tool. We believe that the IRS and Treasury should support the early retirement of tax-exempt bonds and that the anticipatory remedial action rules should be consistent with the existing change in use rules in Treasury Regulation Section 1.141-12.

  • The Proposed Regulations provide a definition of "project" for purposes of applying the allocation methods. As you are aware, Code Section 141(b)(4) provides a special $15 million private use limitation for output facilities which are part of the same "project." The APPA is of the view that it would be burdensome for public power systems (and further complicate the administration of tax law) for the IRS to impose two project definitions for output facilities for purposes of measuring private use under Code Section 141. The APPA suggests that if the IRS and Treasury are of the view that they must provide a definition of "project" for mixed-use output facilities in the final regulations, the definition should be limited to the facilities owned by the governmental unit.

  • Section 1.141-6(h) of the Proposed Regulations provides that private payments arising under an output contract that result in private business use are allocated to the undivided portion financed with qualified equity (notwithstanding Treasury Regulation Section 1.141-4(c)(3)(v)), in the same manner that the private business use from such contracts is allocated to that undivided interest. The APPA appreciates the adoption of this simplified allocation rule and we support its inclusion in the final regulations.

  • The Proposed Regulations generally allow an issuer to use any reasonable, consistently applied allocation method to measure private business use within a mixed-use project subject to an anti-abuse rule. The anti-abuse rule provides that relative fair market value must be used to allocate private business use if the amount allocated to private business use derived by using relative fair market values is "significantly greater" than would be obtained under an otherwise-permitted allocation methodology. We request clarification that the fair market valuation rule does not apply to output facilities and that in all cases that the proportionate benefit is based and measured on available output.

  • We believe that for bond issues issued prior to the effective date of the final regulations, any reasonable consistently applied allocation methods or assumptions ought to be permitted.

  • The APPA appreciates the efforts taken in the Proposed Regulations to improve the private activity multipurpose allocation rules in Treasury Regulation Sections 1.150-1(c)(3) and 1.141-13(d).2 The APPA requests clarification in the final regulations that an issuer is not required to make a multipurpose allocation for purposes of Treasury Regulation Section 1.141-13(d) if it chooses not to do so.

  • We believe that it is appropriate to allocate system sales among issuers' system-wide resources providing similar functionality without the need for a specific allocation under the facts and circumstances test of Treasury Regulation Section 1.141-7(h). Given that the regulated material in this case is a fungible commodity, we believe that tax policy should be focused on whether tax-exempt bond financed system assets (measured based on the percentage of system assets serving the same functional purpose) improperly benefit a private user. As an alternative to the above, in light of vagaries of the facts and circumstances test, we suggest that final regulations provide adequate discretion and flexibility to public power systems based on a number of reasonable safe harbor methods to allocate private use to portions of a facility financed with other than tax-exempt bonds.

  • We ask you to review the position taken by the IRS in example 5 of Treasury Regulation Section 1.141-14(b). We believe that there should be no difference in the treatment of mixed-use output facilities depending on whether the facilities are financed with equity or taxable debt.

  • We believe that the concept of equity does not include any amount allocable to a tax-exempt bond that has been retired. We believe that the adoption of this concept for Code Section 141 purposes, is consistent with the position that the IRS has taken in the arbitrage regulations regarding the amount of proceeds allocable to an issue. We suggest that the any repayment of tax-exempt bonds be treated as equity.

  • Specific Comments

 

1. Mandatory Election to Use the Discrete Portion Method or the Undivided Portion Method.

The Proposed Regulations provide that proceeds of tax-exempt bonds and other funds applied to finance capital expenditures for a mixed-use project are generally allocated ratably unless an issuer makes an election to use either the discrete portion method or the undivided portion method. An issuer must make this election in writing by noting in its records the method of allocation chosen and the preliminary amounts and sources of funds it expects to allocate within the mixed-use project. The time for making this election is on or before the start of the measurement period as provided in Treasury Regulation Section 1.141-3(g)3.

We believe that the requirement for such an election introduces unneeded complexity and should be reconsidered. An issuer will contribute equity to a project in order to finance expected private use or to provide for such flexibility in the future. Having contributed equity to a mixed use project (and issuing a smaller amount of tax-exempt bonds), an issuer should not be precluded from allocating equity to private use due to the failure to make a timely decision. There will also be transactions in which an issuer may not expect private use (as of the date of issue) in a facility partially financed with equity and not perceive a need to make an election. If private use arises at a later point in time in the facility, we fail to see how tax policy will be frustrated by permitting the issuer to allocate private use to the equity financed portion of the facility.

If an election requirement is retained in the final regulations, we strongly suggest that final regulations provide that the election can be made at any time by the issuer. As an alternative to the above, at a minimum, we suggest that any election requirement should not be required earlier than as otherwise provided in Treasury Regulation Section 1.148-6(d)(1)(iii) (i.e., not later than 18 months after the later of, the date that the expenditure is paid or the date that the project is placed in service).

2. Special Rules for Applying the Undivided Portion Allocation Method to Mixed-Use Output Facilities.

It has been clear for more than 30 years that the governmental use portion of an output facility owned jointly by a municipal utility and an investor-owned utility as tenants in common may be financed with tax-exempt bond proceeds.4 The Proposed Regulations provide special rules regarding the application of the undivided interest allocation method to a mixed-use output facility.5 The Proposed Regulations provide that an issuer may elect to apply the undivided portion method to a mixed-use output facility if it is wholly-owned by governmental persons or if it has multiple undivided ownership interests which are owned by governmental persons or private businesses, provided that all owners of the undivided interest share ownership, output and operating expenses in proportion to their contribution to the costs of the output facility (emphasis added).

In the case of output facilities jointly owned by governmental and private businesses, the requirement that such parties share ownership, output and operating expenses in proportion to their contribution to the costs of the output facility will be problematic in a range of financings. In some jointly owned output facilities, the private party may share more of the expenses or may contribute to the cost of the output facility in excess of its share of ownership in the facility. The reasons for this disparity may include a private parties need for output resources and regulatory complexities of building new output facilities. We fail to see a compelling tax policy reason regarding why such parties must share ownership, output and operating expenses in proportion to their cost contribution provided that the private party does not improperly benefit from the tax-exempt bond financed portion of the facility. Accordingly, we request that the final regulations remove this requirement.

3. Undivided Portion Allocation Method -- Generally.

The Proposed Regulations allow an issuer to elect to use the undivided portion allocation method provided that such allocations generally represent "fixed percentages" of the use of the entire mixed-use project. It is not clear under the Proposed Regulations whether the "fixed percentage" means that the amount of private use must be fixed or whether the equity portion of the mixed-use project must be fixed. We believe that the rule should be clarified to provide that the fixed percentage refers to the percentage of the mixed-use project financed with equity.

The Proposed Regulations also provide that the percentage of private business use of the mixed-use project (as determined under the measurement period rules) for any "one year period" that is allocated to an undivided portion financed with equity cannot exceed the percentage of capital expenditures of the mixed-use project used to determine such undivided portion. This same rule applies to output facilities.6 In lieu of a fixed annual private use limitation (plus the permissible de minimis amount), we request that any excess equity (i.e., equity in excess of private use) be permitted to be allocated to private use in future years.

4. Special Rules for Bond Redemptions in Anticipation of Future Private Use.

The Proposed Regulations contain a set of rules permitting the partial redemption of bonds in anticipation of future private use. Members of the APPA use anticipatory remedial action to properly plan for anticipated private use and to manage the complexities associated with Federal energy policy, and energy deregulation matters. The Proposed Regulations permit anticipatory remedial action in anticipation of future private use in very narrow circumstances as further set forth below:

  • Anticipatory remedial action is limited to the retirement of bonds.

  • Bonds must be retired at least 5 years before their scheduled maturity date or mandatory sinking fund date.

  • Bonds must be retired within a period that starts 1 year before the deliberate act occurs and ends 91 days after the deliberate act occurs.

  • The issuer must not reasonably expect at the start of the measurement period that the project would be a mixed-use project.

  • For the first 5 years of the measurement period, the project must not be used in a manner that would cause the private business use limit to be exceeded.

 

Treasury Regulation Section 1.141-12 sets forth a workable regime for unexpected private use. Under these rules, issuers may isolate the "nonqualified bonds" and retire them (if callable) or establish a defeasance escrow for the purpose of retiring such bonds on their first call date. As currently drafted, the anticipatory remedial action rules in the Proposed Regulations introduce a complicated and restrictive regime that significantly limits the effectiveness of this tool. From a tax policy perspective, we fail to see why an issuer should be required to take a deliberate action (and actually cause private use to arise) in order to take a remedial action if it otherwise anticipates private use and wants to be pro active and properly manage its tax risk. We believe that the IRS and Treasury should support the early retirement of tax-exempt bonds and that the anticipatory remedial action rules should be consistent with the existing change in use regime. The APPA would be pleased to meet with you and assist in the further development of these rules.

As you are aware, the change in use rules focus solely on the private use component of the private business use test. Code Section 141 generally provides that a bond issue is in violation of the private activity bond provisions when the issue fails both the private use test and the private payment or security test. Focusing solely on the private use component of the private activity bond test is generally punitive to the issuer and is inconsistent with the general principles of Section 141.7 We believe that the change in use rules should be revised to measure both private payments and use in a manner consistent with the private activity bond test of Section 141.

5. Definition of Project.

The Proposed Regulations provide that the term "project" means one or more facilities or capital projects, including land, buildings, equipment or other property that meets each of the following requirements: (i) the facilities or capital projects are functionally related or integrated and are located on the same site or on reasonably proximate adjacent sites, (ii) the facilities or capital projects are reasonably expected to be placed in service within the same 12 month period, and (iii) the proceeds and other sources of funds that are expended on the facilities or capital projects are expended pursuant to the same plan of financing.

As you are aware, Code Section 141(b)(4) provides a special $15 million private use limitation for output facilities which are part of the same "project." Treasury Regulation Section 1.141-8(b)(1) contains a definition of project for purposes of applying the $15 million limitation. Treasury Regulation Section 1.141-8(b)(2) generally provides (in part), that facilities that are not owned by the same person are not part of the same project.

The APPA is of the view that it would be burdensome for public power systems (and further complicate the administration of tax law), for the IRS to impose different project definitions for output facilities for purposes of measuring private use under Code Section 141. We believe that the IRS and Treasury should avoid formulating one definition of project for purposes of Code Sections 141(b)(1) and (2) and another definition of project for purposes of Code Section 141(b)(4). If the IRS and Treasury are of the view that they must provide a definition of "project" for mixed-use output facilities in the final regulations, such definition should be limited to the facilities owned by the governmental unit.

6. Allocations of Private Payments.

Section 1.141-6(h) of the Proposed Regulations provides that private payments arising under an output contract that result in private business use are allocated to the undivided portion financed with qualified equity (notwithstanding Treasury Regulation Section 1.141-4(c)(3)(v)), in the same manner that the private business use from such contracts is allocated to that undivided interest.

The APPA appreciates the adoption of this simplified allocation rule and we strongly support its inclusion in the final regulations. The current regulatory requirement that an issuer be required to adopt an official intent resolution in order to allocate private payments to the equity financed portion of a facility not later than 60 days after the date of the expenditure creates a trap for the unwary. Moreover, compliance with Treasury Regulation Section 1.141-4(c)(3)(v) will raise certain technical issues. For example, Treasury Regulation Section 1.141-4(c)(3(v)(B) requires that the private payments be made not later than 18 months after the later of the date the expenditure is made or the placed in service date of the project. In certain financings, the equity will be contributed via a taxable borrowing by a non-governmental utility and the private payments will be made over a period of many years.

7. Fair Market Value Rule.

The Proposed Regulations generally allow an issuer to use any reasonable, consistently applied allocation method to measure private business use within a mixed-use project subject to an anti-abuse rule. The anti-abuse rule provides that relative fair market value must be used to allocate private business use if the amount allocated to private business use derived by using relative fair market values is "significantly greater" than would be obtained under an otherwise-permitted allocation methodology. The Proposed Regulations further provide that the measure of an undivided portion of a mixed-use output facility is based on a measuring benchmark equal to the proportionate share of available output (as defined in Treasury Regulation Section 1.141-7(b)(1).

We request clarification that the fair market valuation rule does not apply to output facilities and that in all cases the proportionate benefit is based and measured on available output.

8. Bonds Issued Prior to the Effective Date of Final Regulations.

For bonds issued prior to the effective date of the final regulations, there are no specific private activity allocation regulations. We believe that the final regulations should make it clear that for bond issues issued prior to their effective date, that any reasonably consistent applied allocation method should be permitted.

9. Amendments to Treasury Regulation Section 1.141-13.

The APPA appreciates the efforts taken in the Proposed Regulations to improve the private activity multipurpose allocation rules in Treasury Regulation Sections 1.150-1(c)(3) and 1.141-13(d).8

Final Treasury Regulation Section 1.150-1(c)(3)(ii) published as part of T.D. 9234 removed the ability to make a separate issue allocation for purpose of Section 141 of the Code.9 As a result of this change, it appears that the Section 141 multipurpose allocation regime is now fully contained in Treasury Regulation Section 1.141-13(d) and that such allocations can be made at any time. The APPA requests clarification in the final regulations that an issuer is not required to make a multipurpose allocation for purposes of Treasury Regulation Section 1.141-13(d) if it chooses not to do so.

10. Allocations Pursuant to Treasury Regulation Section 1.141-7(h).

The Proposed Regulations provide that in order for an output contract to be allocated to the equity financed portion of an output facility, the contract must be allocable to the facility under the facts and circumstances test contained in Treasury Regulation Section 1.141-7(h)10.

It is important to underscore that the goal of the private activity output regulations is to guard against impermissible private use of a fungible commodity. The regulatory framework must accommodate the fact that many of our members own integrated electric systems comprised of generating resources, transmission and distribution facilities. The facts and circumstances test for allocating sales of output are difficult to apply and do not provide the requisite flexibility that issuers need to fully and freely allocate output contracts to equity funded output facilities. In order to ensure that tax policy does not unduly frustrate existing energy policy, the IRS can and should provide public power systems with significant flexibility in allocating private use output contracts to equity financed facilities (or portions thereof). We have a number of suggestions in this regard.

We believe that it is appropriate to allocate system sales among an issuers system-wide resources providing similar functionality without the need for a specific allocation under the Treasury Regulation Section 1.141-7(h). For example, with respect to an integrated generation system, if 50% of the generation system is financed with equity, at least 50% of the output may be sold to private parties (regardless of the fact that such contracts are not directly traceable to the units supplying that power or whether the equity financed assets are actually turned on at the moment private use arises). We believe that tax policy in this context should be focused on whether bond financed system assets (measured based on the percentage of the total system assets serving the same functional purpose) improperly benefit a private user. In order to guard against any possible abuse, a private use contract subject to this rule would either be a negotiated arms length agreement or be based on generally applicable and uniformly applied rates.

As an alternative to the above, in light of vagaries of the facts and circumstances test, we suggest that final regulations provide adequate discretion and flexibility to public power systems based on a number of reasonable safe harbor methods to allocate private use to portions of a facility financed with other than tax-exempt bonds.

Finally, the final regulations should provide that Treasury Regulation Section 1.141-3(g)(7) does not apply to output facilities. Under this provision, if an issuer enters into a long-term arrangement for private business use (e.g., a contract with an investor-owned utility) a substantial period of time prior to the date that the actual right to private use commences, private use is deemed to begin on the date that the arrangement is entered into. For example, an issuer may seek to enter into a "forward" contract for a portion of an existing facility expected to be financed with equity or for expected permissible private use. To ensure that tax policy does not unduly frustrate existing energy policy, public power systems should be permitted to operate and manage their facilities to accommodate such future events.

11. Private Activity Anti-Abuse Provisions Needs to be Clarified.

We ask you to review the position taken by the IRS in example 5 of Treasury Regulation Section 1.141-14(b). As you are aware, the regulations provide the IRS with broad authority to take any action (notwithstanding compliance with existing regulatory provisions) to reflect the substance of the transaction.

Example 5 involves an output facility that is expected to sell 30% of its available output to a private user and the remaining 70% of the available output is to be used for governmental purposes. To finance the facility, 30% of the costs will be financed with taxable bonds that have a weighted average life of 15 years and 70% of the costs will be financed with tax-exempt bonds that have a weighted average life of 26 years. The amounts to be paid by the private user are equal to 30% of the sum of debt service on both the taxable and tax-exempt bonds plus operating costs. The example concludes that the allocation of all of the private use to the taxable bonds does not reflect economic substance because the transaction transfers significant benefits of the tax-exempt financing to the private user (i.e., the private user gets the benefit of paying a lower blended rate).

We believe that the legislative focus of Section 141 is to limit the amount of bonds issued for a private purpose and not the types of financing arrangements that issuers mayor may not enter into with respect to mixed-use facilities. Accordingly, we believe that the regulations should not dictate the arrangements that public power systems may enter into with respect to portions of a facility financed with equity.

In addition, we believe that there should be no difference in the treatment of a mixed-use output facility depending on whether the facility is financed with cash/equity or taxable debt. For example, if the issuer described in example 5 financed the facility with 30% cash/equity, there is no regulatory provision that requires that the equity cannot be amortized faster than the tax-exempt debt. In such a case, the tax-exempt bonds could pay interest only for a period of years (i.e., defer principal amortization) or could be issued as capital appreciation bonds provided that such obligations satisfy the "other replacement proceeds safe harbor" (i.e., the 120% weighted average maturity test). The issuers return on its cash/equity investment would be a combination of revenues derived from the facility and its deferral of principal amortization. Accordingly, we see no reason why taxable debt should be treated any differently than cash/equity.

Public power systems must be permitted to arrange their financial affairs in a manner that benefits local citizens, ratepayers and provides them with the overall cheapest cost of capital. Although Congress has not statutorily imposed the 120% weighted average maturity test on governmental bonds, we strongly believe that the other replacement proceeds safe harbor provides the IRS with adequate comfort to guard against abuse in the case of facilities financed with taxable and tax-exempt debt.

12. Clarify Definition of Equity to Include Retired/Defeased Tax-Exempt Bonds.

We believe that the private use limits imposed by Section 141 should only apply to a facility (or portions thereof) to the extent that the facility is subsidized/financed with the proceeds of tax-exempt bonds. Accordingly, we are of the view that the definition of "equity" should include the portion of a facility financed with tax-exempt bonds that have been retired by the issuer as such bonds mature. This approach would be consistent with the universal cap concept of proceeds for arbitrage purposes as provided in Treasury Regulation Section 1.148-6(b)(2). Under a Section 141 universal cap regime, only the portion of a facility supported by outstanding tax-exempt bonds would be subject to the private activity limitations. We believe that consistency in the measurement of proceeds for purposes of Sections 141 and 148 should be a regulatory goal.

A universal cap approach for purposes of Section 141 is consistent with the position adopted by numerous bond counsel when dealing with a change in use of assets involving a sale exclusively for cash under Treasury Regulation Section 1.141-12(d)(2). In the case of such cash sales, it is not uncommon for the amount of disposition proceeds arising from the sale to exceed the amount of outstanding nonqualified bonds. In such instances, numerous bond counsel take the position that the remedial action is limited to the defeasance/retirement of the nonqualified bonds and that any amounts realized from the sale in excess of the nonqualified bonds are not proceeds.

We appreciate the opportunity to comment on the Proposed Regulations and would be happy to discuss these issues with you at your convenience. Please contact Ed Oswald at 202-339-8438, or me at 202-467-2931.

Sincerely,

 

 

James J. Nipper

 

Senior Vice President,

 

Government Relations

 

American Public Power Association

 

FOOTNOTES

 

 

1 Public Law No. 99-514.

2 T.D. 9234.

3 The measurement period of property financed by an issue begins on the later of the issue date of the issue or the date the property is placed in service.

4 Treasury Regulation § 1.103-7, example 13. T.D. 7199.

5 Proposed Regulation § 1.141-6(g).

6 Proposed Regulation § 1.141-6(d)(4)(B).

7 The statutory provisions introduced by Congress as part of the 1986 Tax Act addressing change in use are contained in Code Section 150(b). All of the provisions contained in Code Section 150(b) are limited to qualified private activity bonds. There is nothing in the legislative history of the 1986 Tax Act directing the Treasury Department to issue change in use regulations for governmental bonds.

8 T.D. 9234.

9 Prior regulations permitted issues to make separate issue allocations for purposes of Code Section 141 under Treasury Regulation Section 1.150-1(c)(3)(i).

10 It is essential that guidance provide sufficient flexibility to public power systems regarding the allocation of private use to facilities which have been financed with more than one bond issue. For example, a single generating unit may have several bond issues allocable to it (e.g., one or more long term issue for initial construction, a long term issue for expansion and a short term issue for minor repairs). Given the various layers of bond issues, the requisite issue by issue analysis can be very complex and burdensome to public power systems. Under Section 1.141-3(g)(2)(i) of the Treasury Regulations, the measurement period of an issue ends on the earlier of the last date of the reasonably expected economic life of the facility or the latest maturity date of any bond of the issue financing the property. Accordingly, there are commonly different private use limits applicable to each bond issue. We believe that the last maturity date of any issue financing the facility should be used for all private use measurements. The IRS adopted this approach in private letter ruling 8327090.

 

END OF FOOTNOTES
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