This tax due diligence project was undertaken by a subcommittee of the Tax Law Committee of the National Association of Bond Lawyers (“NABL”) charged with developing one or more due diligence tools for the members of NABL. The following matrix is the product of the subcommittee’s work.

The information in this matrix is based on our industry’s common understanding (i) that bond counsel is generally engaged to deliver an unqualified legal opinion[1] at bond closing that interest on an issue of bonds is exempt from federal income taxation under the Internal Revenue Code of 1986, as amended (the “Code”) and (ii) that the opinion is largely based on the “reasonable expectations” of the issuer and/or borrower[2] as of the issue date regarding the investment and use of the proceeds of the bonds, as well as the source and investment of funds used to pay debt service on the bonds. Thus, it is important that bond counsel keep in mind the reasonable expectations standard contained in Treasury Regulations §§ 1.148-1(b) and 1.148-2(b) and other administrative guidance. Specifically, Treasury Regulations § 1.148-1(b) defines “reasonableness” as follows:

“An issuer’s expectations or actions are reasonable only if a prudent person in the same circumstances as the issuer would have those same expectations or take those same actions, based on all the objective facts and circumstances. Factors relevant to a determination of reasonableness include the issuer’s history of conduct concerning stated expectations made in connection with the issuance of obligations, the level of inquiry by the issuer into factual matters, and the existence of covenants, enforceable by bondholders, that require implementation of specific expectations….”

Treasury Regulations § 1.148-1(b)

In meeting the requirements of the reasonableness standard, bond counsel collects and analyzes the facts relevant to the project(s) to be financed or refinanced, how the proceeds of the bonds will be used, and related documentation to discern the expectations of the issuer and/or borrower as to the use of the project(s) and the use and investment of the proceeds of the bonds; tests the reasonableness of those expectations; and applies the requirements of federal tax law to those expectations. In some cases, the use of experts and third-party certificates and opinions to expand on the information provided by the issuer or borrower is appropriate, recognizing that a legal opinion or advice from an expert should not contradict but should support the facts and expectations provided by the issuer or borrower. For example, bond counsel may investigate the nature and ongoing existence of the issuer, and if applicable, the borrower; the period over which bond proceeds will be expended and invested; the projected payment sources for the bonds; the use and expected use of the facilities or project(s) to be financed or refinanced; the consideration of elections and the timing of elections available and related Treasury Regulations (the “Regulations”); and the relationship between the conclusions drawn by bond counsel during the investigation and the post-issuance compliance requirements and procedures of the issuer and/or borrower. In any event, the information gathered by bond counsel should be of sufficient detail to establish the issuer and/or borrower’s reasonable expectations and to allow bond counsel to identify any gaps or information which would contradict the facts, circumstances, expectations, and assumptions articulated in the tax certificate or agreement.

In the event the information initially provided by an issuer or borrower does not appear to meet the requirements of the “reasonableness” standard, additional investigation should be made, so that based on the totality of information provided, bond counsel is comfortable in its legal conclusion that interest to be paid on the bonds is excluded from gross income for federal income tax purposes, and that the issuer and/or borrower’s expectations that support that conclusion are reasonable.

This process is variously referred to as “tax diligence,” “due diligence,” and “tax due diligence.” Questionnaires, checklists, and site visits can all be effective methods to achieve an understanding of an issuer or borrower’s intentions with respect to financing and using a project. Other methods may include legal and factual research (e.g., reviewing the issuer or borrower’s web site and continuing disclosure information or internet searches); review of financing applications submitted by a borrower to an issuer or other governmental unit (e.g., volume cap applications or rezoning and subdivision requests); and consultation and dialogue with representatives of the issuer or borrower.

The due diligence process is most productive when tailored to individual circumstances, and the host of qualitative considerations outlined above makes a standard approach difficult. The purpose of this matrix is not to mandate or prescribe an industry standard, but rather to provide a useful starting point for NABL members when conducting tax diligence, providing a “road map” to key sections of the Code and Regulations to be consulted; identifying documents from which pertinent facts may be ascertained; and clarifying certain allowable uses of a project and proceeds of tax-exempt bonds.

Governmental bonds are not subject to as many requirements as private activity bonds, so certain technical requirements of the Code applicable to other types of tax-exempt bonds (e.g., TEFRA approval and the 2% limitation on costs of issuance) do not apply to governmental bonds. Nevertheless, certain factors may make diligence for governmental bonds more challenging, such as:

• issuers that infrequently issue tax-exempt bonds;
• issuers of large issues that finance portions of a long list of unrelated projects;
• increases in the burdens imposed on state and local governments, requiring new enterprises and security or revenue sources;
• issuers with severe budgetary, personnel and other resource constraints;
• lack of institutional knowledge; and
• decentralized decision-making and evolving political considerations.

The approach bond counsel uses for tax due diligence, including what further inquiries to make of an issuer or borrower and what additional items to gather, may be shaped by some of the qualitative factors addressed above.

The subcommittee acknowledges that each issue of tax-exempt bonds presents bond counsel with a unique set of facts, circumstances, expectations, actions, and assumptions related to the project(s) to be financed or refinanced, the issuer of the bonds, and the borrower or other person obligated to pay the bonds. Thus, there will be many items covered below that do not apply to a particular bond issue, and there may be items not covered below that should be considered in conducting tax diligence.

The subcommittee also understands that the approach to due diligence practice may vary among bond counsel and is neither prescribing the form or content of investigative instruments and processes nor creating or imposing a mandatory standard for the conduct of tax due diligence. Consequently, this matrix does not advocate for any specific system for gathering and assembling the results of due diligence, but rather aims to support bond counsel’s existing methods of information gathering by providing suggestions that help bond counsel hone their existing procedures, ultimately allowing bond counsel to confidently advise issuers and borrowers as to the allowable uses of bond-financed projects and the proceeds of tax-exempt bonds and prepare an issuer or borrower for success in managing post-issuance compliance.

The subcommittee notes that this matrix does not present an exhaustive list of either the federal legal requirements applicable to an issue of bonds or the factual matters to be ascertained and analyzed. Nor is it a substitute for a thorough review of the applicable provisions of the Code and Regulations. In all cases, care should be taken to verify that the references provided in this matrix remain good law. Further, it is important to note that all citations in this matrix are to law, regulations, and other guidance in effect on the date hereof, all of which are subject to change. In addition, identification of any specific due diligence item in this matrix should not imply or suggest a duty to address that item in any due diligence process. Conversely, the failure to cover any due diligence item in this matrix does not suggest that the item should be excluded in the conduct of due diligence.

This matrix is not intended to provide guidance on opinion or disclosure practice, or to prescribe a documentation standard assured to survive an examination by the IRS. The subcommittee strongly encourages use of available opinion standards such as NABL’s Model Bond Opinion (2024); Treasury Department Circular No. 230, Regulations Governing Practice before the Internal Revenue Service, Section 10.37, Requirements for Written Advice; Code Section 6700, Promoting Abusive Tax Shelters; Internal Revenue Manual, Tax Exempt Bonds (TEB) Examination Program and Procedures, Conducting the Examination, Section 4.81.5; and NABL’s Due Diligence Considerations in Primary Offerings of Municipal Securities, Section 5.1, Variables Affecting Due Diligence Approaches.

Finally, this matrix addresses state law in a purely cursory fashion. It is important to bear in mind that that bonds must be validly issued under applicable state law as a condition to exclusion of interest on the bonds from gross income for federal income tax purposes. Consequently, valid authorization under state law should be the first step in any due diligence process.

The information contained in this matrix represents the views of the subcommittee, and is to be used to further education and tax-exempt bond compliance. The subcommittee hopes this matrix will be of value to you, but it does not constitute legal advice and is not intended to provide legal advice or counsel as to any particular situation.  If you discover any errors or omissions, please direct those and any other comments to NABL.

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[1] See NABL’s Model Bond Opinion (2024).

[2] A person obligated to pay the bonds that is not the issuer, i.e. a conduit borrower, will generally be referred to herein as a “borrower.”

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TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
ENTITY’S AUTHORITY TO ISSUE OBLIGATIONS		Practice Question: Is the issuer a valid issuer for this purpose?   Source: Enabling law for issuer (e.g., State constitution, State statutes, city or county charter or code); corporate organizational documents; contracts between issuer and governments.
VALID ISSUER OF BONDS	Reg. § 1.103-1; Rev. Rul. 77-164; & Rev. Rul. 77-165.   Estate of Shamberg v. Commissioner, 3 T.C. 131(1944), aff’d 144 F.2d 998 (2d Cir. 1944), cert. denied, 323 U.S. 792 (1945), where the three sovereign powers are cited and analyzed; Philadelphia Nat. Bank v. United States, 666 F.2d 834 (3d Cir. 1981), cert. denied, 102 S. Ct. 2904, where Temple University’s police power was not truly police power for this purpose.   Tax-advantaged bonds must be issued by a state, the District of Columbia, possessions of the United States, or a political subdivision with a substantial amount of one or more of the sovereign powers of taxation, eminent domain, or police power (e.g., county, municipality, special district, school district, hospital district).   Certain other entities can also be valid issuers of tax-advantaged bonds if the entity meets certain requirements: – On-behalf of issuers pursuant to Rev. Rul. 57‑187 (created by or under specific state law and issuing on behalf of a state or political subdivision) (see Rev. Rul. 57‑187 & Rev. Rul. 60‑248), – On behalf of issuers pursuant to Rev. Rul. 63‑20, known as “63‑20 corporations” (see Rev. Rul. 63‑20 & Rev. Proc. 82‑26 (providing additional clarity on 63‑20 corporations)), – Volunteer fire departments (see Section 150(e); Reg. § 1.103‑16), – Scholarship funding bond corporations (see Section 150(d)), and – Indian tribal governments (see Section 7871; Section 7701(a)(40) (defines “Indian tribal government”); Rev. Proc. 2008‑55).	Practice Questions: – Does the entity have a substantial amount of sovereign power of taxation, eminent domain, or police power?  – If the entity does not have a substantial amount of sovereign power of taxation, eminent domain, or police power, does the entity meet the requirements to be an on-behalf of issuer, a 63‑20 corporation, a “qualified” volunteer fire department, a scholarship funding bond corporation, or an Indian tribal government? Tips: – This question does not arise with “general purpose” governmental entities (see Reg. § 1.150‑1(e)(3)), but does more so with special purpose entities. – Even if you need higher power governmental approval to issue bonds, the power of taxation, eminent domain, or police power, if sufficient, still is valid sovereign power. – Just because an entity has authority under state statute does not mean such entity can issue federally tax-exempt bonds. – Look at how entity is organized under state law. If organized under not-for-profit law, additional diligence may be appropriate. – Refer to Section 150(d) for whether a corporation is a “qualified scholarship funding corporations” and thus a valid issuer. – There are special rules with respect to the continued qualification of “qualified scholarship funding bonds” as tax-exempt bonds if the corporation ceases to be a “qualified scholarship funding corporation.” – Refer to Section 150(e)(2) to determine if a volunteer fire department is a “qualified volunteer fire department” and thus a valid issuer. – Volunteer fire department bonds are subject to additional requirements, such as TEFRA public approval requirements of Section 147(f). – Refer to Section 7871 to determine if an Indian tribal government will be treated as state and thus a valid issuer. Some Historical Context: Proposed IRS regulations under Reg. § 1.103‑1 (on the definition of political subdivision) were published in February 2016 and withdrawn in October 2017.
VALID UNDER STATE LAW	See Rev. Rul. 87-116.	Source: Enabling law for issuer (e.g., State constitution, State statutes, city or county charter or code) Tip: Validity is not just limited to the ability to issue the type of debt, but also extends to exercise of borrowing power, purpose, approval, maturity, type of financing, etc.
/Debt is an Exercise of Borrowing Power	United States Trust Co. v, Anderson, 65 F.2d 575 (2d Cir. 1933); U.S. Tr. Co. of N.Y. v. Anderson, 65 F.2d 575 (2d Cir. 1933); Balt & O.R. v. Commissioner, 78 F.2d 460 (4th Cir. 1935); Drew v. United States, 551 F.2d 84 (5th Cir. 1977); Stewart v. United States, 739 F.2d 411 (9th Cir. 1984); Rev. Rul. 72-77(condemnation/eminent domain payments don’t result in an obligation of a State or political subdivision).	Practice Question: Is it an obligation?   Tip: Exercise of borrowing power can be in any form, not just bonds. (see, Kings County Dev. Co. v. Commissioner, 93 F2d 33 (9th Cir. 1937).
US CONSTITUTION FIRST AMENDMENT LIMITATION ON SECTARIAN USE OF BOND PROCEEDS	US Constitution – First Amendment & case law thereunder; no establishment of religion or prohibition of free exercise thereof; Carson ex rel. O.C. v. Makin, 142 S. Ct. 1987 (2022); Hunt v. McNair, 413 U.S. 734 (1973) (dealing specifically with bonds).	Tip: This is a 1st Amendment question; tax lawyers are often asked to assist in determining whether certain assets can be financed.   Tension exists between the Establishment Clause and the Free Exercise Clause: “[A] neutral benefit program in which public funds flow to religious organizations through the independent choices of private benefit recipients does not offend the Establishment Clause.” Carson at 1998.   Also consider any state constitutional limitations.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
VALID DEBT FOR FEDERAL TAX PURPOSES	Section 103; Section 150(a)(1); Reg. § 1.150-1(b). Something may not be debt under state law but still may be debt under federal tax law or vice versa. See Gregory v. Helvering, 293 U.S. 465 (1935) (a taxpayer is bound by the economic substance of a transaction if the economic substance varies from its legal form).	Source: Underlying documentation that creates the obligation. Practice Question: Is this debt or something else for federal tax purposes? Tip: The determination of whether an obligation is valid under state law may differ from the determination of whether an obligation is debt for federal income tax purposes.
/Debt Must Be an Obligation	Rev. Rul. 74-113, debt results from an intent to make a loan with an obligation of repayment.   Rev. Rul. 54-106, debt is an obligation regardless or source of repayment.	Practice Question: Does the issuer have an obligation to repay this borrowing?
/Whether an Instrument Constitutes Debt or Equity	Notice 94-47; see also Section 385 and Regs. Promulgated thereunder for another gloss on debt vs. equity analysis.	Tip: Debt / Equity analysis is based on all the facts and circumstances and the overall effect of an instrument’s debt and equity features. A number of factors to consider are listed in Notice 94-47.
/Written Agreement to Pay Interest Required	Under Rev. Rul. 72-399, lease or installment sale payments may contain a stated interest component, which may be tax-exempt.   For instance, consider lease payments that are initially lower than the market rate. The difference may constitute a loan by the lessor to the lessee that is repaid by later payments that are higher than the market rate, including a stated interest component.	Tips: – An issuer may want to enter into a lease/installment sale with a principal and interest component, instead of issuing bonds, to avoid federal securities law and state debt issuance rules. – Contrast this situation with the opposite, where an instrument constitutes debt under state law but not debt under federal tax law and is thereby not eligible for Section 103 tax exemption.
WHETHER “INTEREST” IS INTERST FOR FEDERAL TAX PURPOSES	Old Colony Railroad Co. v. Commissioner, 284 U.S. 552 (1932); Rev. Rul. 69-188	Tip: Interest does not include separate charges made to investigate a prospective borrower and its security, closing costs and drafting fees, or fees paid to service/collect a loan.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
SINGLE ISSUE TREATMENT	Reg. § 1.150-1(c)(1). The term issue means two or more bonds that meet all of the following requirements: (i) Sold at substantially the same time. Bonds are treated as sold at substantially the same time if they are sold less than 15 days apart. (ii) Sold pursuant to the same plan of financing. (iii) Payable from same source of funds. The bonds are reasonably expected to be paid from substantially the same source of funds, determined without regard to guarantees from parties unrelated to the obligor.	Practice Question: Ask issuer/ borrower whether it or any related party has contracted (or will contract) for the sale of any other tax-advantaged debt (e.g., another bond sale, lines of credit, leases, or modification of existing debt (i.e., potential reissuance)) less than 15 days from sale date of the bonds.   Tips: – Ensure that all the obligations to be sold and/or issued have been identified. – Bonds with different delivery dates may nonetheless be part of the same issue, with the “issue date” being the first delivery date. See Reg. § 1.150‑1(b) definitions. – Regulations give examples of what factors are material to the “same plan of financing.” See Reg. § 1.150‑1(c)(1)(ii). – An issuer may want to separate the sale of obligations by at least 15 days to help ensure separate-issue treatment, if desired, but single-issue treatment may still exist under the anti-abuse rule of Reg. § 1.150‑1(c)(5). See FSA 199936009. – For payment expectations, the question is whether bondholders could look to any of the sources as a common, rather than hierarchical, source. See PLR 200114012.
/Different Tax-Advantaged Bonds Treated as Separate Issues; “Pure” Taxable and Tax-Advantaged Treated as Separate Issues	Reg. § 1.150-1(c)(2)   Each type of tax-advantaged bond that has a different structure for delivery of the tax benefit that reduces the issuer’s borrowing costs or different program eligibility requirements (e.g., tax-exempt interest, tax credit, direct subsidy) is treated as part of a different issue.   Tax-advantaged bonds and bonds that are not tax-advantaged (i.e., taxable bonds) are treated as part of different issues.	Tip: Reg. § 1.150‑1(c)(2) requires testing under the arbitrage anti-abuse rules in Reg. § 1.148‑10(a) and other applicable anti-abuse rules when tax-advantaged bonds are issued in a transaction with other bonds that are not tax-advantaged. – Generally, issuers will want to have the taxable maturities (which generally bear higher interest rates) mature earlier than tax-exempt maturities. – Such an allocation is not per se an artificial allocation of maturities but could be so if the issuer is able as a result of such allocation to obtain a material benefit based on arbitrage. For example, such an allocation could result in a higher bond yield (and therefore smaller rebate payments) than if the allocation had not been artificial.
/Treating Bonds of a Single Issue as Part of Separate Issues for Certain Rules	Reg. § 1.150‑1(c)(3).   Bonds of an issue may be treated as part of separate issues if each separate issue (i) finances a separate purpose; and (ii) independently is a tax-exempt bond. This election must be made by the issuer in writing on or before the issue date. The aggregate proceeds, investments, and bonds in such a transaction must be allocated between each of the separate issues using a reasonable, consistently applied allocation method. If any separate issue consists of refunding bonds, the allocation rules of Reg. § 1.148-9(h) must be satisfied. An allocation is not reasonable if it achieves more favorable results than with actual separate issues.   Separate issue election does not apply for purposes of Sections 141, 144(a), 148 (arbitrage), former 149(d), and 149(g).	Practice Question: Is separate issue treatment necessary or advantageous?   Tips: – This election is different than being a wholly separate issue as described in Reg. § 1.150‑1(c)(2). – If desired, may need a separate issue allocation under Reg. § 1.150‑1(c)(3) for tax advantaged bonds of different types that would be otherwise part of a single issue (such as tax-exempt governmental and qualified 501(c)(3) bonds or qualified exempt facility airport bonds) when they share the same structure for delivery of the tax benefit that reduces the issuer’s borrowing costs or different program eligibility requirements is treated as part of a different issue – e.g., only tax-exempt interest. – Election must be made on or before issue date; contrast this with multipurpose allocations under Reg. § 1.148‑9(h) & Reg. § 1.141‑13(d) which may be made at any time, but once made never changed. – Other multi-purpose allocations (e.g., private use multi-purpose allocation under Reg. § 1.141‑13(d) and multi-purpose allocation under Reg. § 1.148‑9(h)) may need to be made concurrently with the separate issue election.
/Draw-Down Loans – Special Rules	Reg. §§ 1.150‑1(c)(4)(i) & 1.149(e)‑1(e)(2)(ii).   Bonds issued pursuant to a draw-down loan are treated as part of a single issue. The issue date is the first date on which the aggregate draws under the loan exceed the lesser of $50,000 or 5% of the issue price.   For information reporting purposes, to be treated as a single issue, all draw-down bonds must be equally and ratably secured under a single indenture or loan agreement. Draw-down bonds issued during different calendar years must reasonably be expected to be advanced within three years of the date of issue of the first bond.	Practice Question: Does this issue consist of a draw-down bond or loan, such that the special draw-down bond rules need to be complied with?   Tips: – Draw-down bonds generally will have a maximum commitment amount, a commitment of the purchaser to fund future draw amounts at the request of the issuer/borrower and in compliance with the documents, a date by which all draws have to be made, and potentially the ability to revolve the draws (i.e., pay down and re-borrow). – Draw-down bonds are often reflected as notes under a tax-exempt line of credit. – Changes to terms of the loan documents such as extension of draw periods, increases of maximum principal amounts, and changes from revolving to non-revolving may or may not constitute a significant modification and thus a reissuance for outstanding notes issued pursuant to the draw-down. – If supplementing private business use and private payments over $15 million, see Notice 2011‑63 regarding special issue-date rules for volume cap purposes.
/Commercial Paper – Special Rules for “Program”	Reg. § 1.150‑1(c)(4)(ii).   Commercial paper program: an 18-month program to issue commercial paper to finance or refinance the same governmental purpose pursuant to a single master legal document.   Commercial paper issued during the same calendar year must be issued pursuant to a loan agreement with a term not in excess of 270 days in order to be treated as part of the same issue.   As with draw-down loans, the issue date for commercial paper issued under the program exceeds the lesser of $50,000 or 5% of the aggregate issue price of the commercial paper in the program.   Commercial paper issued after the 18-month program period can be treated as part of the same program to the extent that:     (1) there is no increase in the principal amount outstanding; and (2) the program does not have a term in excess of— (i) 30 years; or (ii) the period reasonably necessary for the governmental purposes of the program.	Practice Question: Is this issuance part of a commercial paper program such that the special commercial paper rules need to be complied with?   Tips: – Under a commercial paper program, notes with a term of less than 270 days are sold, which often are paid with new short-term notes at their maturity. Such “rolled” commercial paper may be treated as part of a single issue for tax purposes. – Increases to outstanding commercial paper during the 18-month period from the issue date (a “ramp-up”) also may be treated as part of the same issue. “Ramp-ups” outside of the initial 18-month window are treated as a separate issue. Note that as part of that new separate issue, an issuer/ borrower may treat rolls from the prior commercial paper issue occurring within 18 months of the second issue as part of the second commercial paper issue so that there will be only one long-term outstanding issue. – There is a safe harbor provision substantially similar to that in Section 147(b) for meeting the second prong of the test for treatment of commercial paper issued outside of the 18-month period as part of the same program. See Reg. § 1.150‑1(c)(4)(ii)(B). – Special rules exist for reporting commercial paper on Form 8038‑G. See Reg. § 1.149(e)‑1(e)(2)(ii)(A), as well as Form 8038‑G instructions.
/Special Provisions Applicable to General Obligation Bonds	Reg. § 1.150‑1(c)(4)(iii).   An issuer may elect by the issue date to treat otherwise separate general obligation bonds as a single issue, when sold and issued on the same date(s) pursuant to a single offering document (and not when treated as separate issues under Reg. § 1.150‑1(c)(2)).	Tips: – Issuer/ borrower should determine whether there are any apparent advantages/ disadvantages to treating bonds as a single issue or separate issues (e.g., private use blending, arbitrage yield and spend-down/ rebate exceptions, need for identifying maturities to specific purposes/ ability to make multi-purpose allocations instead of treating as separate issues). – A situation where this may be applicable – governmental bonds that are offered pursuant to a single official statement but are payable from separate sources of funds even though they are ultimately all general obligation-backed, e.g., a general obligation-backed bond that is reasonably expected to be paid from water revenues and a general obligation-backed bond reasonably expected to be paid from sales taxes. – Note the limitations of Reg. § 1.150‑1(c)(3)(ii) relating to Sections 141, 144(a), 148, 149(d) and 149(g).
POOLED FINANCINGS	Section 149(f); Reg. §§ 1.148-2(e)(4) & 1.150‑1(c).   A pooled financing bond means any bond issued as part of an issue more than $5,000,000 of the proceeds of which are reasonably expected (at the time of the issuance) to be used (or are intentionally used) directly or indirectly to make or finance loans to two or more ultimate borrowers (certain exceptions apply with respect to bonds to which Sections 146 or 143(l)(3) apply to the issue). To be tax-exempt, must meet the (i) reasonable expectations test regarding timing of loans (30% of net proceeds loaned within one year, 95% by end of year three after issuance), (ii) written loan commitment requirement (borrowers for 30% of net proceeds identified prior to issuance) (other than for state issuers lending to subordinate governmental units or state-created entity lending for water infrastructure projects through the federally-sponsored state revolving fund program), (iii) redemption requirement for loans that do not meet the timing requirement, and (iv) at least 95% of reasonably expected legal and underwriting costs are paid by 180th day after issuance and legal and underwriting costs are not contingent.	Practice Questions: – Are proceeds being loaned to more than one borrower? – How much is being loaned to conduit borrowers? – What is the timing of loans to conduit borrowers – before or after the pooled loan bond is issued?   Tips: – Issuer may need to provide loan commitments, information on borrowers and expectations/ reports and feasibility. – Questionnaires and tax documentation generally will be needed from underlying conduit borrowers regarding use of funds. Program documents are established that set out restrictions.
BRIDGE FINANCINGS	PLR 9644019, TAM 9831003.	Practice Questions: – What were the proceeds of the bridge financing used for? – Is the fact that this is a bridge financing problematic?   Tips: – Even if bridge loan was taxable, need to diligence as if the bridge loan was issued on a tax-exempt basis (e.g., compliance with reimbursement rules). – If proceeds are used to pay off bridge financing, which is an “obligation,” the use of such proceeds is considered to be a refunding. – The bridge financing needs to be analyzed to determine whether it is an obligation, which means any valid evidence of indebtedness under general federal income tax principles; intrafund loans/ accounting debt may not be an obligation, in which case expenditures must be analyzed for reimbursement purposes.
FORWARD DELIVERY BONDS	When structured with current delivery bonds, see Reg. § 1.148‑9(h) regarding multipurpose allocations.   When combined with current delivery bonds the two closings/ series are a single issue under Reg. § 1.150‑1(c) with a single issue date for the issue, but with multiple issue dates for the bonds under Reg. §§ 1.150‑1(b) & 1.149(e)‑1(e).	Tips: – Sale date and issue date concepts arise due to time span between sale date and issue date. – Tax diligence generally required both before sale and before issuance. – See Reg. § 1.149(e)‑1(e) regarding filing Form 8038‑G and multiple issue dates.
CALL PROVISIONS	Reg. § 1.141‑12(d)(5) requires a call within 10.5 years of the issue date as a condition of taking certain remedial actions.	Practice Question: Is there a call date within 10.5 years of issue date?   Tip: This does not have to be a par call to comply with this requirement. It can be a premium or make-whole call.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
/Deep Discount Bonds /Capital Appreciation Bonds (CABs) /Zero Coupon /Stepped Coupon)	Reg. § 1.148‑4(b)(2)(ii) for special yield rules for deep discount bonds with mandatory early redemption.	Tips: – Issues can arise in governmental CABs, which are different from issues that can arise in exempt facility and qualified small issue bonds; see anti-abuse rules under Reg. § 1.148‑10. – Bonds should be callable within 10.5 years for remedial action. – Convertible does not mean callable.
/Variable Rate Demand Investments	Reg. § 1.1275‑5; if the obligation provides for a variable rate of interest or has more than one fixed rate and it isn’t a “variable rate debt instrument,” then it may be a “contingent payment debt instrument.”	Practice Question: Is the variable rate obligation a “variable rate debt instrument” or something else?   Tip: In bank placements where interest rates are subject to alternative calculations, the expectations of the bank as to the effect of a cap or similar restriction on the yield may need to be documented.
/Contingent Payment Debt Instruments (CPDI)	Generally, Reg. § 1.1275‑4, and with respect to tax-exempt obligations, Reg. § 1.1275‑4(d).   Reg. § 1.1275‑5 for definition of “qualified floating rate.”	Practice Question: What does bond counsel’s opinion cover?   Tips: – Contingent payments do not constitute tax-exempt interest. In order to avoid contingent payments, tax-exempt bonds are usually structured so that the stated interest on the instrument qualifies as (1) one or more qualified floating rates, (2) a single fixed rate and one or more qualified floating rates, (3) a single objective rate, or (4) a single fixed rate and a single objective rate that is a qualified inverse floating rate. Reg. § 1.1275‑5(3)(i) and Reg. § 1.1275‑4(d)(2)(ii). – Look out for CPDI with certain subordinate debt structures. – Contingent payment isn’t defined in the Regulations, instead there is a list of debt instruments that do not provide for contingent payments. – The provisions of this section can affect the applicability of Reg. § 1.1275‑5 and how bond yield is calculated.
/Qualified Tender Bonds /Variable Rate Demand Obligations (VRDOs)	Reg. § 1.1001 3(a)(2); Notice 88 130; Notice 2008 27, Notice 2008 41 (The three notices obsoleted after December 30, 2025); Reg. 1.150-3 (these final regulations apply to events occurring and actions taken with respect to bonds on or after December 30, 2025, though an issuer may choose to apply the final regulations to events occurring and actions taken with respect to bonds on or after December 30, 2024).	Practice Question: Do the tender option provisions in the documents comply with Reg. 1.150-3, or if applicable, the IRS Notices for qualified tender bonds?   Tips & Sources – Qualified tender bond is a bond that: (1) bears interest in each mode at a fixed, objective or qualified floating rate; (2) pays interest at least annually; and (3) the final stated maturity date of which is no later than the earlier of: (A) 40 years from issuance; or (B) 120% of weighted average useful life of financed projects, and (4) is subject to a qualified tender right. – If the indenture or other bond documents are modified, there could be concerns that a bond is no longer a “qualified tender bond.”
TAX-EXEMPT “ADVANCE” REFUNDING OF TAXABLE BONDS	Reg. § 1.149(d)‑1(e); CCA 201843009 concerning refunding of Build America Bonds.	Tips: – Generally, tax-exempt advance refunding of taxable debt does not violate the prohibition on advance refundings, unless done to avoid that prohibition, such as refunding tax-exempt debt with taxable, and then refunding the taxable debt with tax-exempt debt, while the original tax-exempt issue is still outstanding for more than 90 days after the refunding tax-exempt debt is issued. – Always double check the anti-abuse rules (Reg. § 1.148‑10) against your facts. – If taxable bonds advance refunded tax-exempt bonds, tax-exempt refunding bonds should not be issued until at least 90 days prior to redemption of advance refunded tax-exempt bonds. Consider yield limitation on transferred proceeds of the tax-exempt refunding bonds.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
THE PROJECT
/What is Being Financed?	Reg. § 1.141‑3(a)(1).	Source: Issuer or borrower should provide new money project description; refinanced project detail may be found in the prior tax documents or other closing documents, but confirm with issuer/ borrower that proceeds were spent as expected.   Tip: Will need project descriptions, description of various sources of funding, estimated placed in service dates and useful lives, final allocation information with respect to refinanced costs.
/Type of Expenditure – Capital Expenditures Versus Working Capital Expenditures	Reg. § 1.150‑1(b) – definition of “capital expenditures” and definition of “working capital expenditures”	Tips: – Working capital financings, other than de minimis exceptions under Reg. § 1.148‑6(d)(3)(ii)(A), have very specific rules. – PLR 8318047: acquisition of a facility from a related party is a refinancing and is treated as financing working capital. See also Rev. Rul. 79‑321. – Notwithstanding current governmental accounting standards, software and software licenses may or may not be considered “capital expenditures” under federal tax law eligible for financing.
/Safe Harbor Against Replacement Proceeds & Useful Life of Capital Assets Versus Weighted Average Maturity of Bonds	Reg. § 1.148‑1(c)(4)(i)(B) – safe harbor against creation of replacement proceeds.   See Section 147(b) for calculation of useful life, Rev. Proc. 62‑21 (1962‑2 C.B. 418) and Rev. Proc. 87‑56 (1987‑2 C.B. 674) for guidance on useful lives of certain assets.   See IRS Publication 946, How to Depreciate Property (updated annually) for helpful information.	Tips: – Consider special rules for useful life of land in Section 147(b)(3). – Despite Section 147 not generally applying to governmental bonds, replacement proceeds may be created if test is not met. – 120% useful life test to meet safe harbor against creation of replacement proceeds applies to governmental bonds in the same way as the requirement for private activity bonds under Section 147.
USE OF PROCEEDS		Use of all proceeds must be evaluated.
/Reserve Fund	Reg. § 1.148‑2(f).   Size limitation: An issue consists of arbitrage bonds if sale proceeds of the issue in excess of 10% of the stated principal amount of the issue are used to finance any reserve or replacement fund, without regard to whether those sale proceeds are invested in higher yielding investments. Amounts in a reserve or replacement fund in excess of the amount that is reasonably required are not part of a reasonably required reserve or replacement fund.   Yield restriction exception: The amount of gross proceeds of an issue that qualifies as a reasonably required reserve or replacement fund, for purposes of the yield restriction exception, may not exceed an amount equal to the least of (i) 10% of the stated principal amount of the issue, (ii) the maximum annual principal and interest requirements on the issue, or (iii) 125% of the average annual principal and interest requirements on the issue.	Tips & Sources – There is no definition of “reasonably required reserve or replacement fund” in the Code or Regulations. – If there is reasonable assurance that an amount is available to pay debt service (even if it is not deposited into a debt service reserve fund), such amount may still be considered deposited into a reserve fund. This doesn’t mean that it is “reasonably required” and thus not subject to yield restriction. – For pure general obligations (as opposed to revenue bonds or limited obligations), there may be a question of over-issuance under the anti-abuse rules in Reg. § 1.148‑10 if financing a reserve or replacement fund, even if size limitations are met.  Special facts and circumstances may overcome this concern. – If an issue has more than a de minimis amount (or 2%) of original issue discount or premium, the issue price of the issue (net of pre-issuance accrued interest) is used to measure the 10% limitation, for purposes of both sizing and yield restriction, in lieu of its stated principal amount.
/Funded Interest	Reg. § 1.148-6(d)(3)(ii)(A)(3).   Interest on the issue for a period commencing on the issue date and ending on the date that is the later of three years from the issue date or one year after the date on which the project is placed in service.	Tip: Some financed interest may qualify as a capital expenditure in its own right (generally that which accrues prior to the placed in service date of the applicable project) not needing the de minimis exception under Reg. § 1.148‑6(d)(3)(ii)(A)(3), but interest accruing after the applicable placed in service date likely needs the exception to avoid the “proceeds spent last” (PSL) rule under Reg. § 1.148‑6(d)(3)(i).
/Funded Qualified Guarantee Fees (Letter of Credit, Bond Insurance)	Reg. §§ 1.148‑6(d)(3)(ii)(A)(2) & 1.148‑4(f).   Fees for qualified guarantees of the issue or payments for a qualified hedge for the issue.	Tips: – Have underwriter or financial advisor (and issuer in reliance thereon) make required certifications described in Reg. § 1.148‑4(f)(2) to have amount factored into yield calculation. – In audits IRS agents commonly request substantiation to establish whether fees are “qualified.”
/Funded conduit loans to other governmental persons; purpose investments & program investments	Reg. §§ 1.148 6(d)(2) & 1.148 1(b) – definitions of purpose investment and program investment; Reg. § 1.148 5(b)(2) – separate classes of investments.	Tip: When considering this, consider pooled loans or loans to a governmental person that does not qualify as an issuer of tax-exempt obligations.
/Funded Grants	Reg. §§ 1.148 6(d)(4) & 1.150 1(f) – definition of grant.	Tips: – A grantor (or issuer) of bond proceeds must look through to the grantee’s use of proceeds for all purposes other than determining when the bond proceeds are spent for arbitrage purposes and any other purposes (such as hedge bonds) that relate to the timing of the expenditure of bond proceeds. So, the same capital expenditure and working capital expenditure rules apply, despite such proceeds being treated as expended. – A requirement to repay a grant if such amounts are not used for the governmental purpose of the grant does not prevent such transfer from being a “grant.” – Grants to a private person result in private business use by a nongovernmental person grantee; however, so long as no payments are made in respect of property used for private business use, no private payment results. – Grant does not give rise to a private loan because the grant is not expected to be repaid. – Beware of “impermissible arrangements” that might turn “taxes” into private payments.
/How is Original Issue Premium to Be Spent?	Reg. § 1.148‑1(b) (definition of “proceeds”).	Tips: – All proceeds, including original issue premium, must be accounted for. – In extremely low interest rate market conditions, the amount of original issue premium generated can be extraordinary and the use of those proceeds should be considered prior to sale to ensure that there are proper uses for such proceeds or the issue should be down-sized on the sale date. – Check for state law limitations on how premium can be expended.
/How Are Investment Earnings Spent?	Reg. §§ 1.148‑1(b) (definition of “proceeds”) & 1.148‑6(d)(6).	Tips: – In an increasing interest rate environment, it can be important to get estimated investment earnings for an issue to ensure issue is sized appropriately and issuer has enough “uses” of proceeds. – Consider whether anticipated investment earnings might warrant down-sizing of issue. – It may be beneficial to have the issuer/ financial advisor estimate the amount of investment earnings for inclusion in the tax documents, especially for certain spending exceptions to rebate. – Further, planning for payment of rebate and setting aside earnings may be necessary. – Consider if funding interest from proceeds already, if investment earnings are used for the same purpose pursuant to Reg. §§ 1.148‑6(d)(3)(ii)(A)(3) or (7) will actually be expended within time period or deposited in a bona fide debt service fund.
PRIVATE ACTIVITY BOND TESTS	Section 141(a); Reg. § 1.141‑1, et. seq.   “Private activity bond” means any bond issued as part of an issue—   (1) which meets— (A) the private business use test (in Section 141(b)(1)), and (B) the private security or payment test (in Section 141(b)(2)), or   (2) which meets the private loan financing test (in Section 141(c)).
PRIVATE BUSINESS TESTS /PRIVATE BUSINESS USE LIMITATION	Section 141(b)(1) – In general, an issue meets the private business use test if more than 10% of the proceeds of the issue are to be used for any private business use.   But see (i) Section 141(b)(3) & Reg. § 1.141‑9 – 5% limitation for private business use unrelated or disproportionate to governmental use of bond-financed assets; (ii) Section 141(b)(5) $15,000,000 limit (but can allocate volume cap for up to 10%); and (iii) Section 141(b)(4) & Reg. § 1.141‑8: lower limitation for certain output facilities.	Tips: – Meeting private business use test does not in itself jeopardize tax-exempt status; as discussed below, the private payment/ security test generally must also be met to have taxable private activity bonds. – The definition of “proceeds” for purposes of the private activity bond tests is in Reg. § 1.141‑1(b) (and is different from the definition of “proceeds” in Reg. § 1.148‑1(b)).
REASONABLE EXPECTATIONS	Reg. § 1.141-2(d).   Issuer must have reasonable expectation on the issue date of the issue that the issue will not meet the private business tests or private loan financing test over the entire term of the issue, unless the exception of Reg. § 1.141‑2(d)(2)(ii) is met for issues with mandatory redemption provisions.	Tip: “Substantial period” in Reg. § 1.141‑2(d)(2)(ii)(A) is not defined. Some firms apply five years in line with Rev. Proc. 93‑17 and others apply 10% of measurement period in Reg. § 1.141‑3(g)(7).
PRIVATE BUSINESS USE	Section 141(b)(1); Reg. § 1.141‑1 through ‑3.   Use by a nongovernmental person in trade/ business is private business use, which may jeopardize tax-advantaged status if coupled with private payments or security.	Practice Question: Who are the users of the bond-financed facilities?   Tip: Any activity by a non-natural person is considered a trade/ business; however, some activities by natural persons are also considered a trade/ business.
/What Is a Governmental Person?	Reg. § 1.141-1(b).   “Governmental person” is any state or local governmental unit or instrumentality thereof.	Tip: U.S. federal government is not a governmental person. To avoid circumventing spending legislation, U.S. federal government is treated as a private user (e.g., housing of federal prisoners is private use), since tax-advantaged financing is essentially a federal subsidy.
/What is an Instrumentality of a Governmental Unit?	Instrumentality of any state or local government unit is defined in Reg. § 1.103‑1.   See Rev. Rul. 57‑128 to identify factors that point to instrumentality status.	Tip: Instrumentalities are governmental persons but are not necessarily proper issuers of tax-advantaged bonds – i.e., distinguish between political subdivision and mere instrumentality.
/Ownership	Reg. § 1.141-3(b)(2).	Tips: – Ownership is with party that has the benefits and burdens of the asset, and is analyzed under general tax principles.  No single factor is determinative. – Ownership may exist under federal tax law even if the nongovernmental person is not the owner under state law (e.g., a lease that is co-terminus with the useful life of the asset). – Some bond counsel refer to the 80% test described in the safe harbor in Section 142(b)(1)(b)(ii) by analogy when evaluating federal tax ownership.
/Leases	Reg. § 1.141-3(b)(3).	Tips: – As with ownership, look to federal tax law to identify a lease. – Sometimes a management contract can be characterized as a lease. Will need to consider (1) the degree of control over the property exercised by the nongovernmental person; and (2) whether nongovernmental person bears the risk of loss.
/Management Contracts	Reg. § 1.141‑3(b)(4).   A management contract is a management, service, or incentive payment contract between a governmental person and a service provider under which the service provider provides services involving all, a portion of, or any function of, a facility.   See Reg. § 1.141‑3(b)(4)(iii) for arrangements that are generally not management contracts and need not be reviewed for compliance with Rev. Proc. 2017-13.   Rev. Proc. 2017‑13 provides safe harbors under which a management contract does not result in private business use.   For older contracts that have not been materially modified since August 18, 2017, see legacy guidance in Rev. Proc. 97‑13, as modified by Rev. Proc. 2001‑39 and amplified by Notice 2014‑67.	Tips: – Due diligence process may involve review of hundreds of management contracts; first pass can eliminate safe harbor contracts. – Facts and circumstances test will govern contracts outside of IRS safe harbors; however, Reg. § 1.141‑3(b) provides that compensation to the service provider cannot be based on a share of net profits from the operation of the bond-financed property/ facility. – Something styled as a “management contract” may be a lease or create ownership under federal tax law principles, in which case safe harbors no longer apply. Consider whether Reg. § 1.141‑3(b)(2) applies instead. – Professional services and other contracts and similar agreements (e.g., physician service agreements) are often management contracts for this purpose.
/Research Agreements	Reg. § 1.141‑3(b)(6).   Sponsorship of governmental research by nongovernmental persons (including U.S. federal government) may be private business use.   Rev. Proc. 2007‑47 provides explanations and safe harbor.	Tips: – Something styled as a “research agreement” may be a lease or create an ownership interest under federal tax law principles, in which case safe harbors no longer apply. Consider whether Reg. § 1.141‑3(b)(2) applies instead. – This is also a facts and circumstances test. – Any agreements that give proprietary rights to a private party will generally fail the Rev. Proc. 2007‑47 safe harbor.
/Other Special Legal Entitlement	Reg. § 1.141-3(b)(7)(i).   Other special legal entitlement – legal entitlement comparable to other private business use categories but not specifically fitting into any of those buckets.	Tips: – Special legal entitlements include priority rights to the use of a facility and generally result in private business use. – Examples include: exclusive provider rights, naming rights (see PLR 200323006), and broadcast rights (PLR 201049003). See PLRs for factors the IRS may consider in determining whether special legal entitlements give rise to private business use. – There does not necessarily need to be a written contract for there to be a special legal entitlement.
/Special Economic Benefit	Reg. § 1.141‑3(b)(7)(ii).   For facilities not used by general public, private business use can arise if a nongovernmental person has a special economic benefit to use the facilities (even if the person doesn’t have something that rise to the level of special legal entitlement).   City of Santa Rosa, California v. C. I. R., 120 T.C. 339 (2003) (use by trade/ business incidental to general public use of same facility does not negate public use).   PLR 202205016.	Tips: – Factors to consider regarding special economic benefit include whether (1) financed property is functionally related, or physically proximate, to property used in private business use, (2) only a small number of nongovernmental persons receive the special economic benefit, (3) cost of financed property is treated as depreciable by nongovernmental person. – Participation of nongovernmental persons in the Medicare Shared Savings Program (MSSP) through Accountable Care Organizations (ACOs) with governmental persons may be special economic benefit; Notice 2014‑67 (partially superseded by Rev. Proc. 2016‑44) provides safe harbors. – See also Examples 6, 7, 8, and 9 in Reg. § 1.141‑3(f).
/Output Facilities	Section 141(d); Reg. § 1.141‑7.   Bonds used to acquire “nongovernmental output property” by governmental person may be private activity bonds (i.e., opposite of Reg. § 1.141‑7).   Purchase of “available output” may be private business use if benefits of owning facility and burdens of paying debt service on financing of facility are thereby transferred to nongovernmental purchaser (e.g., “take contract,” “take or pay contract,” or “requirements contract”).   Output facilities are electric/ gas generation, transmission and distribution; water collection, storage and distribution.   See also Reg. § 1.141‑8 ($15 million limit for output facilities).	Source: The issuer or operator of the system should know if there are any users that are significant or pay rates other than standard rates.   Tips: – A contract for the purchase of “available output” may be properly characterized as a lease under federal tax law or confer other rights that should be analyzed under Reg. § 1.141‑3 instead of Reg. § 1.141‑7. – Consider whether user pays only for output that user uses or if it must pay even if the user doesn’t use output.
EXCEPTIONS TO PRIVATE BUSINESS USE
/Exceptions – General Obligations that Finance a Large Number of Separate Purposes	Reg. § 1.141‑2(d)(5).	Tip: There are seven technical requirements that must all be met to access this exception.  If met, the determination of whether an issue consists of private activity bonds may be based solely on the issuer’s reasonable expectations as of the issue date.
/Exceptions – General Public Use, Use on the Same Basis	Reg. § 1.141‑3(c)(1) & (2).	Practice Question: Does the public have access to facilities and if so, how do members of the public access the facilities?   Tips: – Use as a member of the general public is not private business use. – Need to ensure that use is indeed on the same basis as the general public. See Reg. § 1.141-3(c)(2). – Members of the general public being required to pay for use of the facility at generally applicable rates does not prevent the facility from meeting this exception. – Arrangements not longer than 200 days may be treated as general public use.
/Exceptions – Short-Term Arrangements	Reg. §§ 1.141‑3(c)(3) & 1.141‑3(d)(3).   100-day exception.  Agreements not longer than 100 days may be excluded if: (i) pursuant to generally applicable and uniformly applied rates not reasonably available to natural persons not engaged in a trade or business, and (ii) the property is not financed for a principal purpose of providing that property for use by that nongovernmental person.    50-day exception. Agreements not longer than 50 days may be excluded if: (i) negotiated, arm’s-length arrangement, (ii) compensation is at fair market value, and (iii) the property is not financed for a principal purpose of providing that property for use by that nongovernmental person.	Tips: – Every situation may be different. Need to review contracts to take into account all components of the agreement. – Keep documentation and/ or records regarding why the client built the facility at a certain size if substantially larger than needs on issuance date. – It’s possible that there can be more than one principal purpose of a facility (e.g., housing federal prisoners and sizing a jail facility for future issuer needs as issuer’s population grows).
/Exceptions – Incidental Use	Reg. § 1.141‑3(d)(5).   Incidental uses of a financed facility are disregarded, to the extent that those uses do not exceed 2.5% of the proceeds of the issue used to finance the facility. A use of a facility by a nongovernmental person is incidental if—   (A) Except for vending machines, pay telephones, kiosks, and similar uses, the use does not involve the transfer to the nongovernmental person of possession and control of space that is separated from other areas of the facility by walls, partitions, or other physical barriers, such as a night gate affixed to a structural component of a building (a nonpossessory use);   (B) The nonpossessory use is not functionally related to any other use of the facility by the same person (other than a different nonpossessory use); and   (C) All nonpossessory uses of the facility do not, in the aggregate, involve use of more than 2.5% of the facility.	Tips: – Generally, the 2.5% limit is measured by square footage used as it relates to the facility. – All incidental uses are aggregated for purposes of the 2.5% analysis. – If incidental use exceeds 2.5%, this exception is not available.
/Exceptions – Temporary Developer Use	Reg. § 1.141‑3(d)(4).	Tip: Exception requires the developer’s improvement to produce/ support/ augment an “essential governmental function” as defined in Reg. § 1.141‑5(d)(4)(ii).
/Exceptions – Qualified Improvements	Reg. § 1.141‑3(d)(6).	Tips: – Improved building must have been placed in service more than a year before the improvement began and building cannot have more than 15% private use. – Cannot be enlargement of the building or improvement of space used for private use. – Must be for a governmentally-owned improvement to a governmentally-owned building.
/Exceptions – Use by Agents of the Governmental Person	Reg. § 1.141‑3(d)(1).   Use of proceeds by nongovernmental persons solely in their capacity as agents of a governmental person is not private business use.	Tip: Use by the agent must be solely in its capacity as an agent for a governmental person.
/Exceptions – Use Incidental to Financing Arrangement	Reg. § 1.141‑3(d)(2).   Use by a nongovernmental person that is solely incidental to a financing arrangement is not private business use.	Tips: – A use is solely incidental to a financing arrangement only if the nongovernmental person has no substantial rights to use bond proceeds or financed property other than as an agent of the bondholders. – Includes exception for use by entities acting only as agents of bondholders, such as trustees and guarantors.
MEASUREMENTS OF PRIVATE BUSINESS USE
/Measurement – Measurement Period (From When to When?)	Reg. § 1.141‑3(g).   The measurement period of property financed by an issue begins on the later of the issue date of that issue or the date the property is placed in service and ends on the earlier of the last date of the reasonably expected economic life of the property or the latest maturity date of any bond of the issue financing the property (determined without regard to any optional redemption dates).   See Reg. § 1.141‑13(b)(2) for measurement periods for refunding bonds.	Tips: – Measurement period for private use continues until payment in full of tax-exempt bonds, notwithstanding defeasance, unless the defeasance qualifies as remedial action under Reg. § 1.141‑12(d). – When financing multiple assets, measurement periods can be different due to different asset lives and different placed in service dates. In general, the period of reasonably expected economic life for this purpose is based on reasonable expectations as of the issue date. – Note the special rule in Reg. § 1.141‑3(g)(2)(ii) for refunding a bond anticipation note with proceeds of a long-term bond. – If you “roll” a series of short-term notes beyond the placed in service date and then refund with bonds, the measurement period starts on the placed in service date (not the issue date of the bonds that refund the last of the series of notes) so as to read Reg. §§ 1.141‑3(g)(2)(ii) and 1.141‑13(b)(2)(iii) in harmony. – For an eligible mixed-use project, in each year private business use is allocated first to qualified equity and second to bond proceeds.
/Measurement – Measurement Periodicity; Determination of Averages	Reg. § 1.141‑3(g)(3).   Average percentage of private business use is the average of the percentages of private business use during the 1-year periods within the measurement period (with appropriate adjustments at the beginning and end of measurement period if less than one year).	Tips: – This does not apply for the purposes of ownership or remedial action, which applies the highest percentage of private business use (see Reg. § 1.141‑12(j)(1)). – The “appropriate adjustment” rule for short beginning and ending periods in Reg. § 1.141‑3(g)(3) should be read consistently with the rules for calculating weighted average maturity so you can use 30-day months if interest on the bonds is calculated using the 30/360 method rather than the actual days method.
/Measurement – Measurement Basis	Reg. § 1.141‑3(g)(4).   Concepts of discrete portions/ space (square footage), simultaneous use, timing of use, relationship to fair market value, percentage of revenues.	Tips: – Percentage is based on total private use and total governmental use plus private use – non-use (“dead time” or “dead space”) is ignored. – When financing multiple assets that can’t be measured in a uniform manner, you may measure using (1) cost, (2) value, or (3) revenue. Private use is measured in dollars, so converting different forms of private use to dollars of private use allows for the aggregation of different types. – Measurement using square feet may be tricky: (1) not all square feet (sf) are equal – gross square feet (gsf), net square feet (nsf), rentable square feet (rsf) – be consistent, (2) not all square feet are equal (gold plated bathrooms versus cinder block storage areas), and (3) do not forget to take common areas into account.
PRIVATE PAYMENTS & SECURITY	Section 141(b)(2)(B); Reg. § 1.141‑4.   The payment of debt service on no more than 10% of the proceeds is directly or indirectly (A) secured by any interest in (i) property used or to be used for a private business use, or (ii) payments in respect of such property, or (B) to be derived from payments (whether or not to the issuer) in respect of property, or borrowed money, to be used for a private business use. See Reg. § 1.141‑4(b) for measurement of private payments and security.   Note 10% is reduced to 5% for unrelated or disproportionate use.	Source: Review financing terms; contracts; lease, rental agreement, license, or similar arrangements governing use of financed property or that may generate revenue with respect to the financed property.   Tip: Reg. § 1.141‑4(b) provides that measurement of private payments and security is calculated by (1) taking payments, which are present valued to the issue date using the yield on the issue as a discount rate and (2) comparing it to the present value of the debt service to be paid over the term of the issue, which is present valued to the issue date.
/Private Payments	Reg. § 1.141‑4(c).   Generally, both direct and indirect payments made by any nongovernmental person that is treated as using proceeds of the issue are taken into account as private payments to the extent allocable to the proceeds used by that person.	Tips: – Payments are taken into account as private payments only to the extent that they are made for the period of time that proceeds are used for private business use. Should aggregate all private payments received. – Payments do not need to be made by the actual private business user to count as private payments. – Generally, both direct and indirect payments made by any nongovernmental person that is treated as using proceeds of the issue are taken into account as private payments to the extent allocable to the proceeds used by that person. – Do not count ordinary and necessary operations and maintenance costs paid for financed facility as private payments. See PLR 200441025. – Allocate payments and project based on financing sources. See Reg. §§ 1.141‑4(c)(3) & 1.141‑6(b)(4). – Private payments are not taken into account to the extent they exceed private business use. – Need to also see if there is private security.
/Private Security	Section 141(b)(2)(A); Reg. § 1.141‑(d).	Source: Mortgage/deed of trust, UCC filings, pledge in trust, trust indenture, resolution or other bond documents.   Tips: – Examine all property securing repayment of the issue; note that the property securing the bonds may not be the financed property. – Pledge of unexpended proceeds qualifying for an initial temporary period or deposited in a reasonably required reserve or replacement fund are not taken into account. – In general, property or payments from the disposition of that property that are taken into account as private security are allocated to each issue secured by the property or payments on a reasonable basis that takes into account bondholders’ rights to the payments or property upon default.
/Exception – Generally Applicable Taxes (GATs)	Reg. § 1.141‑4(e).   A generally applicable tax is an enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power that is imposed and collected for the purpose of raising revenue to be used for governmental or public purposes. A generally applicable tax must have a uniform tax rate that is applied to all persons of the same classification in the jurisdiction and a generally applicable manner of determination and collection. Generally applicable taxes are not private payments.	Source: State or local statute, code, regulation, charter.   Tips: – Generally applicable taxes are not private payments. – Determine authority and purpose for taxes imposed; ascertain whether tax being imposed is uniform in tax rate and manner of determination and collection (Reg. § 1.141‑4(e)(2)); identify any special charges other than generally applicable taxes (Reg. § 1.141‑4(e)(3)). – The following are examples of agreements that cause a tax to fail to have a generally applicable manner of determination and collection: an agreement to be personally liable on a tax that does not generally impose personal liability, to provide additional credit support such as a third-party guarantee, or to pay unanticipated shortfalls; an agreement regarding the minimum market value of property subject to property tax; and an agreement not to challenge or seek deferral of the tax.
/Exception – Payments – Payments in Lieu of Taxes (PILOTs)	Reg. § 1.141‑4(e)(5).   PILOTs are treated as generally applicable taxes if they meet the requirements in Reg. § 1.141‑4(e)(5)(i) – (iv): the payment (i) is not greater than the amount imposed by statute for a generally applicable tax in each year; (ii) is commensurate with the amount imposed by a statute for a generally applicable tax in each year under the commensurate standard; (iii) is to be used for governmental or public purposes for which the generally applicable tax on which it is based may be used; and (iv) is not a special charge.	Source: PILOT agreement.   Tip: Identify the generally applicable tax for measuring PILOT payment and purpose of PILOT payment; identify any portion that may be a special charge; make sure PILOT is similar to generally applicable tax and is not matched to debt service.
PRIVATE LOAN	Section 141(c); Reg. § 1.141‑5.   Not more than the lesser of 5% or $5,000,000 of the proceeds can be used to make or finance loans to nongovernmental persons.	Tips: – Depends on facts and circumstances – need to look at whether the transaction is characterized as a loan for federal tax purposes. – A loan that is a non-purpose investment does not cause the private loan financing test to be met. See Reg. § 1.148-1(b) for the definition of non-purpose investment. – Amount actually loaned to a nongovernmental person is not discounted to reflect the present value of the loan repayments.
/Exception – Prepayments as Loans Versus Customary Prepayments	Reg. §§ 1.141‑5(c)(2)(ii) & (iii).	Source: Investment agreement, prepayment agreement, purchase agreement.   Tips: – If prepayment for property or services is delivered more than 90 days from delivery of property/ services, determine whether prepayment falls within safe harbor for prepayment for certain services Reg. §§ 1.141‑5(c)(2)(ii)(A) and – 5(c)(2)(iii) (prepayments for maintenance and repair or computer software updates). – For prepayments of gas or electricity supply, see requirements under Reg. § 1.148‑1(e)(2)(iii)(A).
/Exception – Tax /Special Assessment Loans	Section 141(c)(2); Reg. § 1.141‑5(d).   Must satisfy each of the requirements of Reg. § 1.141‑5(d)(3) – (5) to not be considered a loan.	Source: State or local statute, code, regulation, charter for how tax/ special assessment is created.   Tips: – Confirm project to be financed by the issue serves an essential governmental function under Reg. § 1.141‑5(d)(4)(ii). – Identify timing differentials for payment by different subject property owners Reg. § 1.141‑5(d)(5) (equal basis requirement).
/Exception – Grants & Tax Increment Financings (TIF)	Reg. §§ 1.141‑5(c)(3) & 1.150‑1(f).   In general, a grant of proceeds is not a loan.	Source: Development agreement, loan agreement, grant agreement.   Tips: – Determine whether arrangement meets threshold as grant and not a loan using general federal tax principles. – Look for any repayment obligations, claw-backs, or grantor-related recipients. – It is ok to claw back for impermissible use of grant funding. – If a grant is treated as a loan because of an impermissible agreement made in connection with the grant, the entire grant is treated as a loan unless the impermissible agreement is limited to a specific portion of the tax used to repay the grant. – Generally, a grant using proceeds of an issue that is secured by generally applicable taxes attributable to the improvements to be made with the grant is not treated as a loan, unless the grantee makes any impermissible agreements relating to the payment that results in the taxes imposed on that taxpayer not to be treated as generally applicable taxes. – For grants made with tax increment financing, review agreements with subject property owner(s) or related parties for payments that result in taxes imposed on subject property owner(s) that are not generally applicable taxes under Reg. § 1.141‑4(e).
ALLOCATIONS OF PROCEEDS TO EXPENDITURES, PROJECTS, AND USES	Reg. §§ 1.141‑6 & 1.148‑6.	Tips: – Tax Certificate is indicative of reasonable expectations of use of proceeds, but other than a final allocation specifically made therein, nothing is dispositive. – Default is to specific tracing, unless another allocation has been made. – The IRS has stated that by not requiring allocations to be determined when the expenditure is paid or incurred, the regulations acknowledge that day-to-day practicalities require some flexibility for when issuers must make allocations. See PLR 200924013. – With reallocations, need to consider rebate calculation issues regarding when proceeds were “spent.”
QUALIFIED EQUITY	Reg. § 1.141‑6(b).   The sources of funding allocated to capital expenditures for an eligible mixed-use project are allocated to undivided portions of the eligible mixed-use project and the governmental use and private business use of the eligible mixed-use project in accordance with Reg. § 1.141‑6(b).   Qualified equity is allocated firstto private business use of the eligible mixed-use project and then to governmental use, and proceeds are allocated first to governmental use and then to private business use, using the percentages of the eligible mixed-use project financed with the respective sources and the percentages of the respective uses.	Tip: Rules for “qualified equity” became effective in January of 2016; grandfathering-in of certain refunding issues issued after the effective date of the qualified equity regulations that use old equity principles is allowed pursuant to Reg. § 1.141‑15(l).
/Definition of Eligible Mixed-Use Project	Reg. § 1.141‑6(b)(2).   A project that is financed with proceeds of tax-exempt bonds that, when issued, purported to be governmental bonds (as defined in Reg. § 1.150‑1(b)) and with qualified equity pursuant to the same plan of financing (within the meaning of Reg. § 1.150‑1(c)(1)(ii)).	Model Question: Ask issuer/ borrower who the owner(s) of the project is/ are.   Tip: In addition to a mixed-use project being part of the same plan of financing, the project must be entirely owned by one or more governmental persons or a partnership in which at least one governmental person is a partner.
/Definition of Qualified Equity	Reg. § 1.141-6(b)(3).   Proceeds of bonds that are not tax-advantaged bonds and funds that are not derived from proceeds of a borrowing (this means funds of the issuer or borrower) that are spent on the same eligible mixed-use project as the proceeds of the applicable bonds.	Source: Sometimes plan of finance.   Tips: – Watch out for 3rd party contributions to a project that may be sourced from tax-advantaged funding sources. – If an issue that is being refunded relies on equity that is not qualified equity, it will not be a source to absorb private business use in the same manner that qualified equity can. – Qualified equity does not include equity interests in real property or tangible personal property. – Qualified equity does not include funds used to redeem or repay governmental bonds. – However, under Reg. § 1.141‑14(a), IRS may take action to reflect the substance of a series of transactions where the purposes of Section 141 are circumvented. For example, the IRS may reallocate private use on a pro-rata basis between tax-exempt and taxable bonds (as opposed to allocating first to the taxable bonds) and thus increase the amount of private use of the tax-exempt bonds, where significant benefit of the lower tax-exempt rate is transferred to the private user – e.g., where the private payments are based on debt service on the tax-exempt bonds. See Reg. § 1.141‑14, Example 5. – It may be prudent to advise an issuer/ borrower of these considerations in anticipation of their final allocation of bond proceeds.
/Definition of Same Plan of Financing	Reg. § 1.141‑6(b)(4).   Qualified equity finances a project under the same plan of financing that includes the applicable bonds if the qualified equity pays for capital expenditures of the project on a date that is no earlier than a date on which such expenditures would be eligible for reimbursement by proceeds of the applicable bonds under Reg. § 1.150‑2(d)(2) (regardless of whether the applicable bonds are reimbursement bonds) and, except for a reasonable retainage (within the meaning of Reg. § 1.148‑7(h)), no later than the date on which the measurement period begins.	Model Question: Request from issuer/ borrower when non-tax advantaged sources were expended on the eligible mixed-use project.   Tips: – If the expense could be reimbursed with the applicable bonds, then such expense can be designated as paid from qualified equity, and private use may be correspondingly allocated. – Multiple bond issues financing the same project will each have their own applicable “timing” parameters. – Refer to Reg. § 1.150‑2(d)(2) for timing limitations for expenditure of tax-advantaged sources.
ALLOCATION OF BONDS (MULTIPURPOSE ALLOCATION)	Reg. §§ 1.141‑13, 1.148‑9(h) & 1.150‑1(c)(3).	Tips: – Different series designations alone do not create an allocation to separate issues when bonds are treated as a single issue. Additional steps must be taken. – Different descriptions of uses of proceeds in transaction documents also do not create an allocation to separate issues. – Must have separate purposes to be treated as separate issues (e.g., cannot have separate allocations under multipurpose issue rules within a new money issuance financing a single facility/ governmental purpose). See Reg. § 1.150‑1(c)(3) for examples. – In general, all integrated or functionally related capital projects that qualify for the same initial temporary period under Reg. § 1.148‑2(e)(2) are treated as having a single governmental purpose. – Common costs of a multipurpose issue are not separate purposes. Common costs include issuance costs, accrued interest, capitalized interest on the issue, a reserve or replacement fund, qualified guarantee fees, and similar costs properly allocable to the separate purposes of the issue.
/Multipurpose Allocation – Private Activity & Payment Measurement	Reg. § 1.141‑13(d).	Source: Transaction numbers run (likely will need to work with underwriter/ financial advisor on allocation).   Tips: – Multipurpose allocation must be consistent with Reg. § 1.148‑9(h) allocations. – Can be made at any time, but once made, not changed. – Does not apply for Sections 141(c)(1) (private loan test) or 141(d)(1) (acquisition of nongovernmental output facility test).
/Multipurpose Allocation – Arbitrage	Reg. § 1.148‑9(h).	Source: Asset life calculations, transaction numbers run (likely will need to work with underwriter/ financial advisor on allocation).   Tips: – Multipurpose allocation is disregarded and the issue will be treated as a single issue for purposes of determining: (1) the yield on an issue for purposes of arbitrage (except with multiple conduit loans), (2) the rebate amount, (3) the minor portion, and (4) the portion of an issue eligible for investment in higher yielding investments as part of a reasonably required reserve or replacement fund under Section 148(d). – Primary allocation methodologies: (1) pro-rata across amortization schedule, (2) debt service comparison (savings or proportional in every year), and (3) asset life comparison. – For asset life comparison, different bond counsel have different opinions on how close the ratios need to be.
/Multipurpose allocation – Separate Issue Election	Reg. § 1.150‑1(c)(3).   Bonds may be treated as part of separate issues if the requirements of Reg. § 1.150‑1(c)(3) are satisfied.   (1) Each of the separate issues must finance a separate purpose (e.g., refunding a separate prior issue, financing a separate purpose investment, financing integrated or functionally related capital projects, and financing any clearly discrete governmental purpose).   (2) Each of the separate issues independently must be a tax-exempt bond (e.g., a governmental bond or a qualified mortgage bond).   (3) The aggregate proceeds, investments, and bonds in such a transaction must be allocated between each of the separate issues using a reasonable, consistently applied allocation method.	Source: Transaction numbers run (likely will need to work with underwriter/ financial advisor on allocation).   Tips: – The separate issue election must be made in writing on or before the issuance date. – If issue involves a refunding, must comply with allocation rules under Reg. § 1.148‑9(h). – An allocation is not reasonable if it achieves more favorable results under Sections 103 and 141 to 150 than could be achieved with actual separate issues. – Does not apply for Sections 141, 144(a), 148, 149(d) and 149(g), though other similar elections/ allocations are available for these sections.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
POSSIBLE OVERBURDENING /ABUSE THROUGH EARLY ISSUANCE	Reg. § 1.148‑10(a)(4).   An action overburdens the tax-exempt bond market if it results in issuing more bonds, issuing bonds earlier, or allowing bonds to remain outstanding longer than is otherwise reasonably necessary to accomplish the governmental purposes of the bonds, based on all the facts and circumstances.   Also, extension of temporary period is discussed in Rev. Proc. 89‑5, Rev. Proc. 2021‑3.	Source: Consider timing of necessary approvals and permits, construction contracts, project draw schedules (including expenditure of investment earnings, if necessary).   Tips: – If earlier issue of bonds has been issued for the same project and the proceeds of the earlier issue have not yet been expended, could call into question if the second issue (non-refunding issue) has been issued too early. – Prudent to ask when project will be bid out.
REFUNDING ESCROW EXPENDITURES	Reg. §§ 1.148‑9(d)(2)(ii) & 1.150‑1(d)(2).   Current refunding (escrow is for 90 days or less) vs. advance refunding (escrow is for more than 90 days).	Source: Bond documents (e.g., indenture, lease, resolution), plan of financing, verification report.   Tips: – The issuance of tax-exempt advance refunding bonds to advance refund another issue of tax-exempt bonds is prohibited. – Some bond counsel require that the tax-exempt advance refunding of taxable bonds not be done until the advance refunding escrow is fully depleted if the taxable bonds advance refunded prior tax-exempt bonds, due to issues relating to transferred proceeds and what temporary period, if any, would apply.   Context: Advance refundings of tax-exempt bonds with another issue of tax-exempt bonds were permitted for refunding bonds issued prior to January 1, 2018 pursuant to the prior version of Section 149(d).
REIMBURSEMENT	Reg. § 1.150‑2.	Tips: – Once an expenditure is financed, it may not reimbursed, but instead is analyzed under the refunding rules. See Reg. § 1.150‑2(g)(1). – Beware of timing of expenditures sought to be reimbursed. – Beware of how bond proceeds used to reimburse prior expenditures are subsequently used (e.g., used to defease another issue of bonds). See Reg. § 1.150‑2(h) anti-abuse rules. – If refinancing a taxable loan, the reimbursement requirements must have been met for the taxable loan as well. – The original expenditure to be reimbursed must be a capital expenditure, a cost of issuance for a bond, an expenditure described in Reg. § 1.148‑6(d)(3)(ii)(B) (relating to certain extraordinary working capital items), a grant (as defined in Reg. § 1.150‑1(f)), a qualified student loan, a qualified mortgage loan, or a qualified veterans’ mortgage loan. – Reimbursement is also available for working capital expenditures described in Reg. § 1.148‑6(d)(3)(ii) or when there are no other “available amounts.” See Reg. § 1.148‑6(d)(5).
/Official Intent	Reg. §§ 1.150‑2(d)(2) & 1.150‑2(e).   Official intent covers expenditures up to 60 days prior to adoption; requires project description, maximum amount, intent to debt finance.	Source: Issuer or borrower can assist identifying parties permitted to provide official intent and location of official intent (resolution, board minutes, finance committee minutes, capital budgets).   Model Question: Are there any prior declarations of intent not fulfilled; does the issuer declare intent without using it as a matter of course?   Tips: – Official intent can come in “any reasonable form.” – Determine whether issuer and/or borrower may issue official intent. It is not reasonable to adopt a declaration of intent to reimburse an amount that far exceeds the intended borrowing amount. – While this ensures the issuer doesn’t underestimate the amount, it is not a reasonable expectation.   Context: See NABL comments dated January 20, 2023 Re Declaration of Intent Requirement of Reg. § 1.150‑2.
/Preliminary Expenditures Exception	Reg. § 1.150‑2(f)(2).   The reimbursement timing and official intent requirements do not apply to any preliminary expenditures up to an amount not in excess of 20% of the aggregate issue price of the issue or issues that finance or are reasonably expected by the issuer to finance the project for which the preliminary expenditures were incurred.   Preliminary expenditures include architectural, engineering, surveying, soil testing, reimbursement bond issuance, and similar costs that are incurred prior to commencement of acquisition, construction, or rehabilitation of a project, other than land acquisition, site preparation, and similar costs incident to commencement of construction.	Source: Ask whether there are pre-issuance expenditures for which reimbursement is being sought.   Tips: – Timing of commencement of construction is key – expenditures cease to be preliminary even if they are soft costs post-commencement of construction. – Ask when ground breaking occurred or is expected to occur.
/De Minimis Exception	Reg. § 1.150‑2(f)(1).   Reimbursement timing and official intent requirements do not apply to costs of issuance or to an amount not in excess of the lesser of $100,000 or 5% of the proceeds of the issue.	Tip: This is an issue-by-issue limitation.
/Reimbursement Allocation	Reg. § 1.150‑2(d)(2).   Reimbursement allocation means an allocation in writing that evidences an issuer’s use of proceeds of a reimbursement bond to reimburse an original expenditure. An allocation made within 30 days after the issue date of a reimbursement bond may be treated as made on the issue date.	Tips: – See Reg. § 1.150‑1(d)(2) for reimbursement period limitations. – Form 8038‑G requires a reimbursement amount to be listed, so at least a reasonable expectation of reimbursement amount should be documented at closing even if the official reimbursement allocation is done later. – If an invalid reimbursement allocation is made, it could result in complications for refundings and for the existing tax-exempt issue.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
RESTRICTED WORKING CAPITAL
/Definitions	Reg. § 1.150‑1(b); see also Sections 263 & 263A; Reg. § 1.148‑6(d)(3)(ii).   Working capital expenditure means any cost that is not a capital expenditure. Generally, current operating expenses are working capital expenditures.   Restricted working capital includes expenditures that are not capital expenditures and not one of the working capital exceptions under Reg. § 1.148‑6(d)(3)(ii).	Source: Discussions with issuer about expenditures expected to be financed with issue/ projected budget.   Tips: – Verify that issuer is authorized to issue bonds for working capital purposes. – State law can also limit term of financing for such expenditures. – Issuers may mistake federal tax law definition of “capital expenditure” with governmental accounting standards definition, which may differ in many respects.
/Proceeds Spent Last (PSL)	Reg. § 1.148‑6(d)(3)(i).   Proceeds spent last allocation method applies to restricted working capital expenditures.   Except as otherwise provided in Reg. § 1.148‑6(d)(3) or Reg. § 1.148‑6(d)(4), proceeds of an issue may be allocated to working capital expenditures as of any date only to the extent that those working capital expenditures exceed available amounts (as defined in Reg. § 1.148‑6(d)(3)(iii)) as of that date (i.e., a “proceeds-spent-last” method).	Source: Expected projected cash flows of issuer/ borrower to establish sizing and need for bond funding; municipal advisor or others collect data on past and expected expenditures.   Tips: – Replacement proceeds included in definition of proceeds for this purpose. – The proceeds spent last allocation requires that “available amounts” be exhausted (except for a de minimis amount and other exceptions listed in Reg. § 1.148‑6(d)(3)(ii)) before spending proceeds on working capital expenditures. – Issuer/ borrower should prepare cash flow forecast showing fund levels by month or shorter period through the date that proceeds are expected to be fully spent. – Determine the “available amounts” (as defined in Reg. § 1.148‑6(d)(3)(iii)).
/Computation of Available Amounts	Reg. § 1.148‑6(d)(3)(iii).	Source: State law/ statutory and other legal authority for use of funds and restrictions on use of funds.   Tips: – Need to closely examine funds, intra-fund loans that could be considered available amounts (lending from an available amount fund to a non-available amount fund), transfers between funds, and expenditures of the type financed by the issue. – Available amounts are also required to be calculated annually post-issuance.
/Reasonable Working Capital Reserve	Reg. § 1.148‑6(d)(3)(iii)(B).   Reasonable working capital reserve treated as unavailable (i.e., excluded from available amounts) except for purposes of TRANS spending under Section 148(f)(4)(B)(iii); 5% rule (reserve can’t exceed 5% of working capital expenditures from prior fiscal year).   Reserve calculations can include (1) all working capital expenditures of the issuer in the prior fiscal year, regardless of the source of funds, and (2) all capital expenditures of the issuer paid from current revenue of the issuer in the prior fiscal year.	Source: Expenditures of issuer/ borrower in fiscal year prior to the year available amounts are being tested/ determined, review of statements, treasurer’s receipts, end-of-month cash flow statements.   Tips: – Determine reasonable working capital reserve based on prior fiscal year expenditures if all expenditures are expected during the fiscal year in which the debt is issued. If expenditures are expected to continue into a second (or even later) fiscal year, determine an expected reserve based on expected expenditures during the first (or second or third) fiscal year. – If the size of the working capital reserve sizing is in excess of the limits, such excess is considered an “available amount.”
/Working Capital Reimbursement	Reg. § 1.148‑6(d)(5).	Source: Historical cash flow deficit statements.   Tips: – Tax-exempt bonds (including TRANs) can be used to reimburse (1) expenditures made when there were no available amounts at the time the expenditure was made and on the date of reimbursement allocation, or (2) expenditures that fall within the de minimis exception under Reg. § 1.148‑6(d)(3)(ii). – Rules for capital expenditure reimbursements under Reg. § 1.150‑2 do not apply. – Bonds can be issued even if future deficits are not expected.
/13-Month Maturity Limitation for Short-Term Working Capital Financings	Reg. § 1.148‑1(c)(4)(i)(B)(1).   13-month maturity limitation safe harbor against creation of replacement proceeds.	Tips: – Although the regulations provide a safe harbor against replacement proceeds, still need to consider whether proceeds are treated as “spent” for federal tax purposes. – Ensure that issuer or borrower reasonably expects to expend the proceeds within 13 months of the issue date.
/Tax and Revenue Anticipation Notes (TRANs) Safe Harbor	Section 148(f)(4)(B)(iii).   Special rule for TRANs where proceeds spent when the “safe harbor cumulative cash flow deficit” to be financed by such issue exceeds 90% of the proceeds of such issue (for purposes of this computation, working capital reserve treated as available).	Source: Same projected and actual cash flow information, but without the reasonable working capital reserve.   Tip: Useful when the reserve is difficult to calculate or when the reasonable reserve is less than 10% of the amount borrowed; cannot be used for long-term working capital.
Long-Term Working Capital Bonds Do Not Meet Fixed Time Safe Harbor Maturity Limit – Safe Harbor Against Other Replacement Proceeds	Reg. §§ 1.148‑1(c)(4)(i)(B)(4) & 1.148‑1(c)(4)(ii).   Process in place for fiscal year available amounts testing, investment and remediation.	Tips: – There are significant post-issuance annual requirements with which the issuer/ borrower must comply for long-term working capital financings. It could be beneficial for the issuer to consult with its financial advisor for preparation of these calculations. – Issuers should develop end-of-year reporting procedures to enable timely calculation of available amounts, which must be used to redeem bonds or be appropriately (re)invested. – Sometimes beneficial to add this requirement to the trust indenture as something that the trustee prompts the issuer to calculate each fiscal year.
EXTRAORDINARY WORKING CAPITAL	Reg. § 1.148‑6(d)(3)(ii)(B).   Exception from proceeds spent last method of accounting for expenditures for extraordinary, nonrecurring items that are not customarily payable from current revenues, such as casualty losses or extraordinary legal judgments in amounts in excess of reasonable insurance coverage.	Source: Discussions with issuer/ borrower and, if necessary, outside consultants, on the extraordinary and non-recurring nature of the expenditures. If in excess of insurance coverage (or there is no coverage for type of expenditure), evidence that the level of insurance was “reasonable” (may consider information from third party insurance provider or industry standard).   Tips: – Many factors may need to be taken into account in determining the extraordinary or non-recurring nature of a particular expenditure. – Should document this type of expenditure and reasoning for why it is extraordinary in the tax documentation. – PLR 200306004 provides some factors to determine when expenditures are “extraordinary:” “When evaluating whether the term of an issue to finance extraordinary working capital expenditures is reasonable, it is necessary to consider the nature of the event giving rise to the expenditures, the size of the expenditures relative to the size of the issuer’s budget, and the issuer’s overall economic condition. A relevant consideration is the impact of the expenditure on the issuer’s operating budget over the term of the issue that will finance the expenditures.” – PLR 202309014: bonds issued for extraordinary working capital were not required to have the remediation that long-term working capital bonds typically require.
/Working Capital Reserve	Reg. § 1.148‑6(d)(3)(ii)(B).	Source: Discussions with issuer, review of fund and cash flow statements, annual financial report, and legal documents establishing funds and expenditures.   Tips: – Is there a reserve or available amounts set aside for such expenditures (e.g., self-insurance fund) by the issuer/ borrower or a related party? If so, gross proceeds in reserve allocated only after all other available amounts are spent. – May need to downsize bond funding based on reserves/ set-asides or other amounts that may be deemed spent first, which could impact the bonds’ satisfaction of spending requirement.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
ARBITRAGE BONDS	Section 103(a).   Except as provided in subsection (b), gross income does not include interest on any state or local bond. Under Section 103(b)(2) an arbitrage bond does not receive this benefit, so such bond is taxable.   Section 148(a) – the term “arbitrage bond” means 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.   A bond is treated as an arbitrage bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in paragraph (1) or (2).	Tips: – Need to look at how gross proceeds of the issue are expended and invested. – This analysis includes loan of gross proceeds or just the temporary investment of gross proceeds.
/Gross Proceeds	Reg. § 1.148‑1(b).   Gross proceeds means any proceeds and replacement proceeds of an issue.	Tip: Care should be taken to find and consider all gross proceeds.
/Replacement Proceeds	Section 148(a)(2) and Reg. § 1.148‑1(c).   Amounts are replacement proceeds of an issue if the amounts have a sufficiently direct nexus to the issue or to the governmental purpose of the issue to conclude that the amounts would have been used for that governmental purpose if the proceeds of the issue were not used or to be used for that governmental purpose.	Tips: – Replacement proceeds are gross proceeds for purposes of Section 148. – For this purpose, governmental purposes include the expected use of amounts for the payment of debt service on a particular date. – Replacement proceeds include, but are not limited to, sinking funds, pledged funds, and other replacement proceeds described in paragraph Reg. § 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.
//Sufficient Direct Nexus	Reg. § 1.148‑1(c)(1).   A pledge is not required, but “mere availability” or “preliminary earmarking” is not in itself a sufficient nexus.	Source: Discuss with issuer/ borrower; review formal proceedings.   Tips: – Typically deals with “revenues” (e,g., taxes, user fees, grants, donations, investment income) to replace project proceeds. – Ability to use “revenues” for other purposes can remove nexus. – Are there amounts available that would have been used for the governmental purpose of the issue? – Fundraising such as capital campaigns can give rise to replacement proceeds.
//Sinking Funds	Reg. § 1.148‑1(c)(2).   Includes debt service fund, redemption fund, reserve fund, replacement fund or any similar fund, to the extent reasonably expected to be used directly or indirectly to pay debt service on the issue.	Model Question: Are there any accounts, not established pursuant to the bond documents, in which amounts to be used to pay debt service on the issue will be held?   Source: Bond documents (e.g., ordinance, indenture, resolution, loan agreement, security documents), plan of finance, history of how the funds were used.   Tips: – Typically deals with revenues to pay debt service. – This situation can arise when there is a sufficiently large bullet maturity that cannot be paid from current revenues. These amounts do not have to be set aside in debt service account established as part of the documents. – Just because amounts held in an account (even if not pledged) can be used for other purposes in addition to the payment of debt service on the issue does not mean that the account is not a sinking fund. This is based on reasonable expectations for the use of the fund, not whether the fund is available for other purposes in the event of financial distress.
//Pledged Funds	Reg. § 1.148‑1(c)(3)(i).   A pledged fund is any amount that is directly or indirectly pledged to pay principal or interest on the issue.   No particular form but must provide reasonable assurance that such amounts will be available to pay debt service even if the issuer/ borrower encounters financial difficulties.	Source: Bond documents (e.g., ordinance, indenture, resolution, loan agreement, security documents), plan of finance.   Tips: – Typically deals with revenues to pay debt service. – Consider other permitted/ expected uses of funds.  Will such amounts be available to pay debt service? – Sometimes the lender’s control of use of funds in a particular account can cause the account to be a pledged fund. – Pledged funds include funds pledged to the guarantor of an issue (e.g., a letter of credit provider).
//Negative Pledge	Reg. § 1.148‑1(c)(3)(ii).   An amount is treated as pledged to pay principal or interest on an issue if it is held under an agreement to maintain the amount at a particular level for the direct or indirect benefit of the bondholders or a guarantor of the bonds. An amount is not treated as pledged if (A) the issuer may grant rights in the amount that are superior to the rights of the bondholders or the guarantor or (B) (1) the amount does not exceed reasonable needs for which it is maintained, (2) the required level is tested no more frequently than every six months, and (3) the amount may be spent without any substantial restriction other than a requirement to replenish the amount by the next testing date.	Source: Bond documents (e.g., ordinance, indenture, resolution, loan agreement, security documents), plan of finance, and discussion with the issuer to discuss reasonableness of requirement.   Tips: – Typically deals with restrictions on revenues to ensure adequate revenues to pay debt service. – Past history can be one of the bases for establishing reasonableness.
//Other Replacement Proceeds	Reg. § 1.148‑1(c)(4)(i).   Replacement proceeds arise to the extent that the issuer reasonably expects as of the issue date that— (1) the term of an issue will be longer than is reasonably necessary for the governmental purposes of the issue, and (2) there will be available amounts during the period that the issue remains outstanding longer than necessary. Whether an issue is outstanding longer than necessary is determined under Reg. § 1.148‑10.	Tips: – There are several safe harbors to avoid creating other replacement proceeds. – The requirements of Reg. § 1.148‑6(d)(3) apply to these other replacement proceeds.
///Safe Harbors Against Creation of Other Replacement Proceeds	Reg. §§ 1.148‑1(c)(4)(i)(B).   As a safe harbor, replacement proceeds do not arise under Reg. § 1.148‑1(c)(4)(i)(A)—   (1) for the portion of an issue that is to be used to finance working capital expenditures, if that portion is not outstanding longer than the temporary period under Reg. § 1.148‑2(e)(3) for which the proceeds qualify;   (2) for the portion of an issue (including a refunding issue) that is to be used to finance or refinance capital projects, if that portion has a weighted average maturity that does not exceed 120% of the average reasonably expected economic life of the financed capital projects, determined in the same manner as under Section 147(b);   (3) for the portion of an issue that is a refunding issue, if that portion has a weighted average maturity that does not exceed the remaining weighted average maturity of the prior issue, and the issue of which the prior issue is a part satisfies Reg. § 1.148‑1(c)(4)(i)(B) (1) or (2); or   (4) for the portion of an issue (including a refunding issue) that is to be used to finance working capital expenditures, if that portion satisfies Reg. § 1.148‑1(c)(4)(ii).	Tips: – Average reasonably expected economic life of financed assets calculated as described in Section 147(b). – Conference Report No. 97‑760, at 519‑520 (1982): “In general, the economic life of assets is determined on a case-by-case basis. However, in order to provide guidance and certainty, the conferees intend that the administrative guidelines established for the useful lives used for depreciation prior to the ACRS system (i.e., the midpoint lives under the ADR system where applicable and the guideline lives under Rev. Proc. 62‑21 in the case of structures) may be used to establish the economic lives of assets. However, the taxpayer can issue bonds with maturities longer than these administrative guidelines would allow where the taxpayer can show, on the basis of the facts and circumstances that the economic life to the principal user or users of the assets for whom the bonds are issued is longer than the lives established by the administrative guidelines.” – See Rev. Proc. 87‑56 (administrative guidelines for useful life calculations).
YIELD RESTRUCTION	Section 148(a) and Reg. § 1.148‑2.   For purposes of Section 103, the term “arbitrage bond” means 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.	Tips: – Unless an exception applies, bond proceeds generally may not be invested in “higher yielding investments.” Arbitrage yield limitations apply to both purpose and nonpurpose investments. – Threshold questions with respect to yield restriction: —What are the gross proceeds of the issue? —What investment property has been purchased with gross proceeds? Proceeds may be invested in higher yielding investments during a temporary period, without causing the bonds to be arbitrage bonds. – Once the temporary period ends, there are several ways in which issuers can comply with the yield restriction rules. – In addition to selecting particular types of investments, the issuer may in certain cases be able to make a payment to the Treasury to reduce the yield on the investments (yield reduction payments).
/Definition of Investment Property	Section 148(b)(2) – The term investment property means: (A) any security (within the meaning of Section 165(g)(2)(A) or (B)), (B) any obligation, (C) any annuity contract, (D) any investment-type property, or (E) in the case of a bond other than a private activity bond, any residential rental property for family units which is not located within the jurisdiction of the issuer and which is not acquired to implement a court ordered or approved housing desegregation plan.   Section 148(b)(3) – “investment property” does not include any tax-exempt bond, other than a specified private activity bond (as defined in Section 57(a)(5)(C)), which constitutes “investment property” for issues other than an issue a part of which is a specified private activity bond (i.e., an “AMT bond” is investment property for other than AMT bonds).   Section 148(b)(4) – “investment property” does not include a prepayment under a qualified natural gas supply contract (defined in Section 148(b)(4)(B)).	Model Question:  What will proceeds of the issue be used for and how will they be invested?    Tips: – Check bond documents to see if bond proceeds will be used to purchase investment property. – Request representations from the issuer that proceeds, including sale proceeds and gross proceeds (which includes replacement proceeds) will not be invested in any investment type property. – Tax-exempt bonds, including State and Local Government Series Securities from the United States Department of the Treasury, Bureau of Public Debt (“SLGS”), are not investment property so no yield limitation applies.
/Materially Higher Yield	Section 148(b) – higher-yielding investments means any investment property which produces a yield of the term of the issue which is materially higher than the yield on the issue.   Reg. § 1.148‑2(d) provides definition of materially higher.   Materially higher yield types: – General rule – 1/8 of one percentage point – Refunding escrows and replacement proceeds – 1/1000 of one percentage point – Program investments (other than student loans) – 1.5% – Student loans – 2%	Tips: – Tax-exempt bonds, including demand deposit SLGS, are not investment property, so no yield limitation applies. – To determine if amounts are invested at a materially higher yield: Step 1 is to determine what type of investment you have. Step 2 is to determine the applicable definition of materially higher that relates to that class of investments. – The definition of materially higher differs depending on the class of investment. – If yield restricted investments in the same class are subject to different definitions of materially higher, the applicable definition of materially higher that produces the lowest permitted yield applies to all the investments in the class.
BOND (ARBITRAGE) YIELD	Reg. § 1.148-4.
/Fixed Versus Variable	Reg. §§ 1.148-1(b) & 1.148-4.   Definition of “fixed yield bond,” “fixed yield issue,” “variable yield bond,” “variable yield issue.”	Source: Bond documents (e.g., ordinance, indenture, resolution, loan agreement, security documents, mortgage), plan of finance.   Tips:  – Variable yield is different than variable rate. – Ask yourself: “Is the bond yield known to maturity?” – Consider whether the bonds are draw-down bonds. – Consider multimodal, change for corporate tax rate, ratings, or otherwise, interest versus other fees. – Bonds with merely integrated qualified hedges are still variable yield bonds. – Super integrated qualified hedges give bonds fixed yield treatment.
/Contingent Payment Debt Instruments	Reg. § 1.1275‑4.   See “Interest Rate Structures/ Contingent Payment Debt Instruments” above.	Source: Bond documents (e.g., ordinance, indenture, resolution, loan agreement, security documents, mortgage), plan of finance.   Tips: – Watch for rates determined by multiplying a qualified floating rate by a fixed multiple less than 0.65 or greater than 1.35 (e.g., 50% of 30-day SOFR plus spread). – Watch for transactions with two fixed rates that change on a date uncertain – this will create contingent payment debt instruments.
/Fixed Yield Adjustments	Reg. § 1.148‑4(b).   In general, the yield on a fixed yield issue is determined as of the issue date and does not change. Exceptions to the one-time calculation rule: Reg. §§ 1.148‑4(b)(4) & 1.148‑4(h)(4)(iii).	Source: Bond documents (e.g., ordinance, indenture, resolution, loan agreement, security documents, mortgage), plan of finance; financing schedules.   Tips: – Adjustments to yield, pursuant to Reg. § 1.148‑4(b)(2)(ii), for “deep discount bonds,” being bonds subject to mandatory early redemption, with a stated redemption price at maturity that exceeds the initial offering price of such bonds by more than one-fourth of 1% multiplied by the product of the stated redemption price at maturity and the number of years to the weighted average maturity date of such bonds. – Adjustments to yield for certain fixed yield bond subject to optional early redemption – for reasonably expected redemptions within five years (Reg. § 1.148‑4(b)(3)(ii)(A)), high premium bonds (Reg. § 1.148‑4(b)(3)(ii)(B)), or stepped coupon bonds ((Reg. § 1.148‑4(b)(3)(ii)(C)).
/Qualified Guarantee	Reg. §§ 1.148‑4(f) & 1.148‑6(d)(3)(ii)(A)(2). Fees properly allocable to payments for a qualified guarantee for an issue (as determined under Reg. § 1.148‑4(f)(6)) are treated as additional interest on that issue under Section 148.   A guarantee is a qualified guarantee if it satisfies each of the requirements of paragraphs Reg. § 1.148‑4(f)(2) – (4).	Source: Insurance or letter of credit documents (e.g., reimbursement or LOC agreement), plan of finance.   Tips: – Issuer must have reasonable expectation of present value of interest savings exceeding present value of cost of guarantee. Typically, established by a certificate of the underwriter or municipal advisor regarding the expected benefit of having the guarantee in place. – Fees paid by the issuer for services other than transfer of risk must be separately stated.
/Qualified Hedge	Reg. §§ 1.148‑4(h) & 1.148‑6(d)(3)(ii)(A)(2).   Payments made or received by an issuer under a qualified hedge relating to bonds of an issue are taken into account (as provided in Reg. § 1.148‑4(h)(3)) to determine the yield on the issue. Except as provided in paragraphs Reg. § 1.148‑4(h)(4) and Reg. § 1.148‑4(h)(5)(ii)(E), the bonds to which a qualified hedge relates are treated as variable yield bonds from the issue date of the bonds.	Source: Review hedge documents (e.g., ISDA master and swap confirmation), plan of finance.   Tips: – There are special rules for hedges on fixed yield issues. – Best practice is to include swap identification documents as part of tax certificate. – Verify that swap identification documents are complete (no blanks and no missing requirements) within 15 days of entering into the hedge.
INVESTMENT YIELD	Reg. § 1.148‑5(b)(1).	Tips: – In order to determine whether the investment of proceeds will result in a bond being an arbitrage bond (and thus, taxable), the correct investment yield must be determined. – The yield on investments is a determination of the rate of return on the investments of gross proceeds. It is computed under the economic accrual method, using the same compounding interval and financial conventions used to compute the yield on the issue. – Investment yield includes yield on the loan agreement for a conduit financing. If the payment on the loan is pass-through debt service, this yield already includes the bond yield, so any additional payments may increase the investment yield.
/Classes of Investments	Reg. § 1.148‑5(b)(2).   Yield is computed separately of each class of investments. Individual investments within a class are treated as a single investment with a blended yield.   Classes of investments include: (A) each category of yield restricted purpose investment and program investment that is subject to a different definition of materially higher under Reg. § 1.148‑2(d)(2); (B) yield-restricted nonpurpose investments; and (C) all other nonpurpose investments.	Tip: In cash defeasance structures, often the yield on the advance refunding escrow to advance refund the prior issue is not looked to when those securities are the same class of investment as the cash defeasance escrow. The yield computed should be a single yield for these escrows.
/Non-Purpose Investments	Reg. § 1.148-1(b).   Non-purpose investment is any investment property, as defined in Section 148(b), that is not a purpose investment.	Tips: – Nonpurpose investments are generally required to be acquired (or treated as acquired) for fair market value. Reg. § 1.148‑5(d)(3). – Under Section 148(f)(2), the rebate requirement applies only to nonpurpose investments.
/Purpose Investments	Reg. § 1.148‑1(b) – “purpose investment” is an investment that is acquired to carry out the governmental purpose of an issue.	Tip: In conduit issues, the loan to the borrower is a purpose investment, and the relevant investment yield is the yield on the loan. In the governmental bond context, a purpose investment can occur if the issuer makes a loan of bond proceeds to another governmental person.
/Program Investments	Reg. § 1.148‑1(b).   Program investment means a purpose investment that is part of a governmental program in which—   (1) the program involves the origination or acquisition of purpose investments;   (2) at least 95% (90% for qualified student loans under Section 144(b)(1)(A)) of the cost of the purpose investments acquired under the program represents one or more loans to a substantial number of persons representing the general public, states or political subdivisions, 501(c)(3) organizations, persons who provide housing and related facilities, or any combination of the foregoing;   (3) at least 95% of the receipts from the purpose investments are used to pay principal, interest, or redemption prices on issues that financed the program, to pay or reimburse administrative costs of those issues or of the program, to pay or reimburse anticipated future losses directly related to the program, to finance additional purpose investments for the same general purposes of the program, or to redeem and retire governmental obligations at the next earliest possible date of redemption;   (4) the program documents prohibit any obligor on a purpose investment financed by the program or any related party to that obligor from purchasing bonds of an issue that finance the program in an amount related to the amount of the purpose investment acquired from that obligor; and   (5) the issuer has not waived the right to treat the investment as a program investment.	Tips: – To be a program investment the bond documents must prohibit the borrower from purchasing the bonds of the issue in the amount related to the amount of the purpose investment. – The difference in arbitrage treatment between purpose investments and program investments can be significant and calculating the loan yield can be tricky. See PLR 8328051, also known as the “Nine Costs Ruling.”
/Valuation of Investments	Reg. § 1.148‑5(d).   Ways to value, depending on circumstances: (i) outstanding principal amount, (ii) present value, (iii) fair market value (FMV).   Reg. § 1.148‑5(d)(6). There is a rebuttable presumption that if the requirements of the safe harbor for such investment are not met, then the investment is not purchased at fair market value.   Safe harbors for certificates of deposit (Reg. § 1.148‑5(d)(6)(ii)), yield-restricted defeasance escrows and guaranteed investment contracts (Reg. § 1.148‑5(d)(6)(iii)).	Source: Financing schedules, verification report, publicly reported market prices of escrow securities.   Tips: Sometimes it is not possible to fit within a safe harbor (e.g., attempted but failed to get three bids for sale of open market securities for a defeasance escrow when SLGS window is closed). In these instances, some bond counsel will seek additional trading data about comparable securities on the bid date. For yield restricted defeasance escrows and guaranteed investment contracts, requirements contained in the safe harbor should be included in the bid specifications and bidding agent and/or provider should make certifications that requirements were met or reasoning why certain requirements were not met.
/Administrative Costs of Investments	Reg. § 1.148‑5(e).   In general, qualified administrative costs are taken into account when determining the yield on investments.   See definitions of qualified administrative costs for non-purpose investments (Reg. § 1.148‑5(e)(2)(ii)), purpose investments (Reg. § 1.148‑5(e)(3)), and limitation for program investments (Reg. § 1.148‑5(e)(3)(ii)(B))   There are safe harbors for yield-restricted defeasance escrows and guaranteed investment contracts (Reg. § 1.148‑5(e)(2)(iii)).	Tip: Carefully review definition of qualified administrative cost as it relates to the type of investment being acquired.
/Yield Reduction Payments	An issuer may in certain cases be able to make a payment to the Treasury to reduce the yield on the investments (a yield reduction payment).   See Reg. § 1.148-5(c)(3) for types of investments that are eligible for yield reduction payments	Tips: – Yield reduction payments are different and separate from rebate payments. An issuer could be required to make two separate payments (a yield reduction payment and a rebate payment) for an issue to not be considered arbitrage bonds. – Pay close attention to what investments are eligible for yield reduction payments.
TEMPORARY PERIODS	Reg. § 1.148‑2(e); see also Rev. Proc. 89‑5 extension of temporary period in certain situations where certain information is provided.	Tips: – Temporary periods apply only for purposes of yield restriction, not rebate. – Unless a specific exception to rebate applies, amounts that meet a temporary period for yield restriction purposes are still subject to rebate. See Rebate sections for spending exceptions for rebate.
/Three or Five-Year Temporary Period for New Money Capital Projects	Reg. § 1.148‑2(e)(2).   Temporary period for new money capital projects is three years. A five-year temporary period may be available if certain requirements are met on the issue date.   Required tests for new money temporary periods: – Expenditure Test (Reg. § 1.148‑2(e)(2)(i)(A)), – Time Test (Reg. § 1.148‑2(e)(i)(2)(B)), and – Diligence Test (Reg. § 1.148‑2(e)(i)(2)(C)).	Source: Project draw schedule, anticipated bid schedule or bid specs for construction, construction contract, or licensed architect’s or licensed engineer’s certificate and representation by the issuer/ borrower.   Tips: – To apply the five-year temporary period, both the issuer/ borrower and a licensed architect or engineer must certify that the longer period is necessary to complete the capital project. – Projects qualifying for the five-year temporary period will also need to meet the interim spending targets required by the hedge bond rules under Section 149(g)(2). – Note that capital project includes related working capital to which Reg. § 1.148‑6(d)(3)(ii)(A) applies.
/90-Day for Current Refunding Escrow	Reg. § 1.148‑9(d)(2)(ii)(A).   General temporary period for a current refunding is escrow is 90 days.   The temporary period for proceeds (other than transferred proceeds) of a current refunding issue that has an original term to maturity of 270 days or less is 30 days. See Reg. § 1.148‑9(d)(2)(ii)(B).	Tip: Pay attention to sources other than current refunding bond proceeds for escrow (e.g., transferred proceeds or replacement proceeds), which may have different temporary periods.
/13-Month for Certain Other Current Refunding Proceeds	Reg. § 1.148‑9(d)(2)(iv).   Except for proceeds of a refunding issue held in a refunding escrow, proceeds otherwise reasonably expected to be used to pay principal or interest on the prior issue, replacement proceeds not held in a bona fide debt service fund, and transferred proceeds, the temporary period for gross proceeds of a refunding issue is the 13-month period beginning on the date of receipt.	Tip: Examples of proceeds of a refunding issue that would get a 13-month temporary period include proceeds used for issuance costs or proceeds used for funded interest that are part of a bona fide debt service fund.
/13 Months for Working Capital and Up to Two Years for TRANs	Reg. § 1.148‑2(e)(3) provides a general 13-month temporary period for proceeds to be used on working capital expenditures.   Reg. §§ 1.148‑6(d)(3)(iii)(D) & 1.148‑2(e)(3)(ii) for TRANs.   The term “tax or revenue anticipation notes,” while used in the Code, is not defined. It is generally thought to apply to relatively short-term obligations (no more than two years) that are issued for working capital purposes.	Source: Expected projected cash flows of issuer/ borrower with receipt of taxes or other revenues to be used to repay the TRAN.   Tips: – For tax anticipation notes where the issuer reasonably expects to use tax revenues arising from tax levies for a single fiscal year to redeem or retire an issue AND the issue matures by the earlier of two years after issue date or 60 days after the last date for payment of those taxes without interest or penalty, temporary period is extended until maturity date of the issue. – Must verify date payment of taxes used to repay the TRAN may be paid without interest or penalty payment to determine eligibility of extended TRAN temporary period.
/13-Month for Bona Fide Debt Service Funds	Reg. § 1.148‑2(e)(5)(ii) provides 13-month temporary period for bona fide debt service funds.   Reg. § 1.148‑1(b) definition of “bona fide debt service fund.”	Tip: If only a portion of a fund qualifies as a bona fide debt service fund, only that portion qualifies for the 13-month temporary period.
/One-Year for Investment Proceeds	Reg. § 1.148‑2(e)(6) provides a temporary period for investment proceeds – one year from date of receipt.	Tip: One-year temporary period doesn’t apply for refunding escrows.
/30-Day for Replacement Proceeds	Reg. § 1.148‑2(e)(5) provides a 30-day temporary period for replacement proceeds beginning on the date that the amounts are first treated as replacement proceeds.	Source: Ask issuer/ borrower/ financial advisor if there are any debt service fund moneys or other replacement proceeds of the issue on hand or expected to be on hand in the future.   Tip: Check bond documents for funds where debt service funds or other replacement proceeds might be held; ask about from where debt service is paid.
/Transferred Proceeds	Reg. § 1.148‑9(d)(2)(iii).   Temporary periods for transferred proceeds are generally based on remaining temporary period, if any, for such proceeds of the prior issue before transfer.	Source: Ask trustee for any outstanding balances. If there is no trustee, ask issuer/ borrower/ financial advisor if there are any proceeds from the prior issue on hand.   Tips: – Generally, each available temporary period for transferred proceeds of a refunding issue begins on the date those amounts become transferred proceeds of the refunding issue and ends on the date that, without regard to the discharge of the prior issue, the available temporary period for those proceeds would have ended had those proceeds remained proceeds of the prior issue. – In the case of an advance refunding (including a taxable advance refunding) the initial temporary period of the prior issue ends on the issue date of the refunding bonds. Reg. § 1.148‑9(d)(2)(iii)(B).
/Permanent for Reasonably Required Reserve or Replacement Funds (DSRF)	Reg. §§ 1.148‑2(f), 1.148‑5(c)(3)(v), 1.148‑6(e); see also rebate rules under Section 148(f) and Reg. § 1.148‑3.   Unlimited temporary period for “reasonably required reserve or replacement fund.”	Tips: – Only the portion of a reserve that meets the least of the three tests receives the permanent temporary period from yield restriction. – Portion of a reserve fund in excess of the three-part test (overfunded) generally must be yield restricted; note special yield reduction payment rule where DSRF is larger than least of the three tests but still less than 15% of par/ issue price (Reg. § 1.148‑5(c)(3)(v)). – See Reg. § 1.148-6(e) for special rules for commingled reserve funds and Reg. § 1.148‑2(f)(3) for certain parity reserves.
/For Pooled Financings	Reg. § 1.148‑2(e)(4); Section 149(f).   Six-month temporary period for the issuer, however, this reduces the conduit borrower’s available temporary period; Reg. § 1.148‑2(e)(4)(i). Two-year temporary period for any portion of pooled financing issued that qualifies as a construction issue. Reg. § 1.148‑2(e)(4)(iii).   Proceeds from the sale or repayment of a loan that are reasonably expected to be used to make or finance new loans has a three-month temporary period for the issuer. Reg. § 1.148‑2(e)(4)(ii)(A).	Tips: – Need to determine the type of pooled loan financing you have to determine the temporary period. – Ask issuer anticipated use of receipts from repayment of loans. – Temporary period for proceeds loaned to a conduit borrower under a new loan is reduced by period proceeds were held by issuer.
/30-Day Temporary All Other Amounts	Reg. § 1.148‑2(e)(7).   Gross proceeds not otherwise eligible for a temporary period qualify for a temporary period of 30 days beginning on the date of receipt.
/No Temporary Period	Reg. § 1.148‑5(c); 31 CFR Part 344.   If no temporary period applies, yield restriction will be necessary, and if investments are made above the bond yield, yield reduction payments may be necessary.   No temporary period applies to investments in tax-exempt investments or demand deposit SLGS.	Tips: – Definitions of “higher yielding investments” in Section 148(b), “investment property” in Section 148(b)(2). – Per Section 148(b)(3)(A), investment property does not include tax-exempt bonds (but note AMT restriction under Section 148(b)(3)(B)). – Under Reg. § 1.150‑1, demand deposit SLGS and 95% non-AMT mutual funds are also tax-exempt bonds for this purpose.
REBATE	Section 148(f).   Required payment beginning 60 days after fifth “bond year” or 60 days after retirement of the Issue of bonds, if sooner. Issues may qualify for multiple spending exceptions from rebate.	Source: Tax certificate, verification report, Form 8038‑G for arbitrage yield.  Ask for rebate report.  Ask for account statements if no rebate report prepared.    Tips: – A covenant to undertake rebate calculation and payment should be in bond documents and/or tax documents. – Issuers should use a rebate analyst to compute rebate unless the issuer has such capabilities in-house.
/Bond Year	Section 148(f)(4); Reg. § 1.148‑7.   Six-month (Reg. § 1.148‑7(c)); 18-month (for capital projects) (Reg. § 1.148‑7(d)); two-year exception (for construction issues) (Reg. § 1.148‑7(e), which requires reasonable expectation of 75% construction expenditures and certain other elections).	Source: Expense reports/ account statements/ rebate reports.   Tips: – Pay attention to “reasonable retainage” concepts. – For two-year exception, verify the “available construction proceeds” to be used for actual construction expenditures, as opposed to acquisition expenditures. See Reg. § 1.148‑7(g) for definition of construction expenditures.
/Construction Issue Election	Section 148(f)(4)(C); Reg. § 1.148‑7(f) through (l).   Application of actual facts (Reg. § 1.148‑7(f)(2)).   Whether the earnings on reasonably required reserve fund are included (Reg. § 1.148‑7(i)(2)).   Separate issue election (Reg. § 1.148‑7(j)).   To pay a 1 ½ % penalty in lieu of rebate (Reg. § 1.148‑7(k)).
/Small Issuer Exemption	Section 148(f)(4)(D); Reg. § 1.148‑8.   (A) Issuer generally must be a governmental unit with general taxing powers; (B) issue must not include any private activity bonds; (C) 95% of net proceeds must be used for local government activities; and (D) aggregate principal amount of tax-exempt bonds issued in calendar year must not be expected to exceed $5,000,000.   An additional $10,000,000 of issuance permitted for construction of public school facilities, which can include charter schools and community colleges.   Application of issue price vs. principal amount for purposes of meeting this exception depends on whether more than a de minimis amount (2%) of original issue discount or premium on the issue exists.   See Reg. § 1.148‑8(d) for treatment of loans to a conduit borrower in pooled financings.	Source: Discuss plans with issuer.   Tips: – Bank qualified and small issuer exception to rebate rules are similar, but NOT identical. – An entity can be a valid issuer of bonds but not be an entity that can utilize the small issuer exception because it doesn’t have general taxing powers. – A governmental unit’s exercise of its taxing power may be subject to procedural limitations, such as voter approval, but may not be contingent on approval by another governmental unit. – Certain aggregation rules apply – (1) need to look at subordinate entities; and (2) an issuer and all entities (other than political subdivisions) that issue bonds on behalf of that issuer are treated as one issuer. – Sections 148(f)(4)(D) (v) and (vi) provide restrictions on application of the small issuer exception to refunding issues. – In applying the small issuer size limitation, there is not taken into account the portion of an issue that is a current refunding issue to the extent that the stated principal amount of the refunding bond does not exceed the portion of the outstanding stated principal amount of the refunded bond paid with proceeds of the refunding bond.
/Who Will Calculate and Who Will Pay?		Tips: – Consider whether issuer/ borrower has post-issuance tax compliance procedures regarding arbitrage and rebate and whether a rebate analyst has been engaged. – Covenants generally included in bond or tax documents.   Context: Markets have been such that, for many years prior to the release of this matrix, rebate was rarely owed. That is changing. Many issuers/ borrowers may be out of practice or have forgotten that they have rebate responsibilities. With rising interest rates, rebate liability may be generated.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
GENERAL	Section 149(g).   Any bond is a hedge bond unless (1) the issuer reasonably expects that 85% of the spendable proceeds of the issue will be used to carry out the governmental purposes of the issue within the three-year period beginning on the date the bonds are issued and (2) not more than 50% of the proceeds of the issue are invested in nonpurpose investments (as defined in Section 148(f)(6)(A)) having a substantially guaranteed yield for four years or more.   Spendable proceeds is defined in Reg. § 1.149(g)‑1(a) as net sale proceeds which is defined in Reg. § 1.148‑1(b) as sale proceeds minus any proceeds in a debt service reserve fund and minus the minor portion.	Tips: – Intended to curtail bonds being issued too early often to lock in lower interest rates that may not be available in the future. – Hedge bonds that don’t meet the requirements contained in Section 149(g)(1) are taxable. – If a prior issue of bonds financed the same bond-financed project, consider whether the proceeds of the prior issue have been expended. – Expenditure expectations are not based on possible change in interest rates. – Do not include bonds the proceeds of which are invested in other tax-exempt bonds the interest on which is not a preference item for purpose of AMT. – Bond proceeds invested in a bona fide debt service fund and investment earnings held for 30 days or less pending reinvestment are treated as invested in non-AMT bonds.
REFUNDING	Section 149(g); Reg. § 1.149(g)‑1:   If present issue is a refunding, such issue does not consist of hedge bonds if original new money bonds refunded by the present issue were not hedge bonds.	Tips: – A refunding bond is not a taxable hedge bond only if the original bond met the requirements of not being a taxable hedge bond. – There are special rules for bonds issued to refund bonds issued prior to July 1, 1993. – Special anti-abuse rules may apply. See Reg. § 1.149(g)‑1(c)(2). – If there is significant delay in original expenditure schedule, may require additional inquiry into facts and circumstances resulting in delay.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
IS THIS A REFUNDING?	Reg. § 1.150‑(d) – definition of refunding issue. See also Reg. § 1.150‑(d)(2) for exceptions and proposed regulations: REG-165706-01.	Tip: Some issues can be treated as a new money issue even though debt service on a prior issue is paid.
HOW AND WHEN WILL PROCEEDS BE USED?
/Current Versus Advance Refunding	Section 149(d)(2); Reg. § 1.150‑1(d)(3) & (4).   A current refunding is a refinancing of bonds in which the refunded bonds are redeemed within 90 days of the issuance date of the refunding bonds.   An advance refunding is a refinancing of bonds in which the refunded bonds are redeemed more than 90 days after the issuance date of the refunding bonds.   Prohibition against advance refunding tax-exempt obligations with other tax-exempt obligations.	Tips: – If the proposed refunded bonds are tax-exempt bonds, verify that the proposed refunded bonds are going to be redeemed within 90 days of the proposed issue date of the refunding bonds. Check that the proposed call date is a business day. – Unexpected excess proceeds should not be used to pay principal on another issue. – There are limited circumstances when unexpected excess proceeds can be used to pay interest on another issue. See Reg. § 1.150‑1(d)(2)(i).
/Description of Prior Debt, Financed Activities, Use of Proceeds		Tips: – Unless certain exceptions are met, generally, assets financed or refinanced by the prior issue are treated as financed or refinanced by the refunding issue. – Request (1) copy of the prior tax and arbitrage certificates (including all attachments and exhibits thereto), (2) IRS Forms 8038/8038-G filed, (3) a copy of the most recent rebate calculation prepared for the prior debt (if any), (4) any allocation or reallocation documentation, and (5) information regarding actual use of bond proceeds if all proceeds of the prior issue were not expended on the issuance date of the prior issue. – Actual use of proceeds can be different from allocation of such proceeds, so asking for uses and any post-issuance allocation or reallocation documents is critical. – If the issuer/ borrower cannot account for how proceeds were expended, ask for trustee requisitions.
/Unspent Proceeds?		Source: trustee/ issuer/ borrower.   Tip: Document how unspent proceeds will be used.
/Sale or Investment Proceeds of the Refunded Bonds?		Tips: – Consider what fund such unspent proceeds are from: project fund, construction fund, capitalized interest funds, costs of issuance account, debt service reserve fund, escrow, etc. – Ask why such proceeds are unspent. – Ask if such amounts have been yield restricted, if required. – If these amounts aren’t used to redeem/ defease the bonds, these amounts would be considered transferred proceeds (see Reg. § 1.148‑9(b) & (c)).
/May Become Transferred Proceeds	Reg. §§ 1.148 9(b), (c) & (d)(iii).	Tip: Consider temporary periods for transferred proceeds.
/Are There Replacement Proceeds?	Reg. § 1.148-1(c).	Source: trustee/ issuer/ borrower.   Tip:  Unless the prior transaction documents or state law permit alternative use of debt service fund, bond fund, or sinking fund dollars, such amounts should be used to refund the refunded bonds.
/Hedge Termination Payments	Reg. § 1.148_6(d)(3)(ii)(A)(2).	Tips: – When the swapped bonds are refunded, the swap can usually be treated as continuing as a qualified hedge for the refunding bonds. See Reg. § 1.148‑4(h)(iv)(D). – Note that because this rule relates to a “refunding,” if the refunding issue is recharacterized as a new money issue under the acquisition/ refunding rules, this rule won’t apply, and the termination payment might not be financeable. – If the swap is actually terminated, and the issuer/ borrower owes a termination payment, then two questions arise: (1) how to treat it for yield purposes and (2) whether refunding bonds, if any, can be used to finance the termination payment.
AUDITED?		Source: Ask issuer/ borrower; check EMMA; request audit paperwork.   Tips: – May want to look at more than no change letter. – Try to obtain all responses to IDR requests.
PRIOR ASSETS SOLD?	Reg. §§ 1.141‑3, 1.141‑12, 1.141‑2(d).	Source: Ask issuer/ borrower and do an internet search of the property being refinanced.   Tips: – If bond-financed asset is sold to a nongovernmental person, then sale of asset is treated as private business use for which there are private payments. – If so, ask if remedial action was taken under Reg. § 1.141‑12 or rules followed under Reg. § 1.141‑2(d). It is possible that no remedial action was required. – Look at measurement period tests for private activity percentages.  Note Reg. § 1.141‑12(j) for allocation for non-qualified bonds.
REMEDIAL ACTIONS?	Reg. §1.141‑12; Reg. § 1.141‑2(d).   Rev. Proc. 2018‑26.	Tips: – Analysis for tax due diligence varies depending on type of remedial action taken. – If remedial action was taken, confirm proper procedures for such remedial action were followed. – If alternative use of disposition proceeds remedial action option is utilized, need to determine if disposition proceeds were expended during required time period on permitted assets. Such assets financed by disposition proceeds are then treated as part of the bond-financed assets.
FORWARD DELIVERY BONDS OR CINDERELLA BONDS?		Tips: – Need to complete due diligence and do bring-down diligence if there is a gap between sale and issue date. – For Cinderella bonds some bond counsel take the position that a reissuance needs to be triggered for bonds to be converted from taxable to tax-exempt, while others take the position that it can automatically occur. – To avoid “half-baked” deal in a reissuance context, some firms recommend selling taxable bonds and tax-exempt forward bonds on the same date. The tax-exempt forward bonds will be issued to refund the taxable bonds. This creates a “synthetic” Cinderella bond and typically gets the issuer where it wants to be without the risk. In applying this method, need to take care regarding issuing the tax-exempt refunding bonds too early if the taxable advance refunding escrow remains outstanding.
INVESTMENT OF ESCROW?		Tip: If gross funding escrow, need to determine how investment proceeds will be used and if such use of proceeds is permitted.
/Yield Restriction Issuers, Replacement Proceeds	Reg. §§ 1.148‑1(c), 1.148‑2 & 1.148‑5.	Tips: – Cash-funded escrows need to be yield-restricted, as replacement proceeds for refunded tax-exempt bonds. – Notwithstanding the ordering rules of Reg. § 1.141‑6(b), some bond counsel yield restrict defeasance escrows for a tax-exempt issue that are funded with taxable bond proceeds. – Some may distinguish between a taxable issue and a taxable loan that is not a “bond” under Reg. § 1.150‑1.
/Special Yield Reduction Payments (YRPs) Rule	Reg. § 1.148‑5(c)(3).	Tip: Can use YRPs in a refunding context, if: – SLGS are not available; – for certain variable yield bonds; and – for nonpurpose investments allocated to replacement proceeds of a refunded issue, including a refunded issue that is an advance refunding issue as a result of the application of the universal cap to amounts in a refunding escrow.
/Valuation of Investments & Special Rules for Yield-Restricted Defeasance Escrows	Reg. §§ 1.148‑5(b)(2)(iv); 1.148‑9(c) & 1.148‑5(d)(6)(iii).	Source: Bidding paperwork.   Tips: – Single investment treatment; mixed escrow allocations. – Safe harbor for open market purchases requires bid process and bid certificates to determine fair market value (mostly applicable in advance refunding context).
/SLGS	Reg. § 1.148‑5(d)(6)(i); 31 CFR Part 344.	Tips: – Be mindful of whether SLGS can be used depending on source of payment. See Reg. § 344.1. – There are special rules regarding when SLGS are not permitted. See Reg. § 344.2(f). – Fair market value is equal to SLGS purchase price is their fair market value for arbitrage purposes. – Make sure a party who is authorized to subscribe for SLGS is at the table.
TAXABLE ADVANCE REFUNDING OR CASH DEFEASANCE		Tips: – See also “Taxable Structures.” – Arbitrage and private activity tests apply to tax-exempt refunded bonds until redeemed. – Limited remedial action options are available to remediate non-compliance with private activity bond tests when tax-exempt bonds have been advance refunded with taxable bonds. – In cash defeasance scenario, verify that issuer has not issued tax-exempt new money bonds with reimbursement within one year prior to the cash defeasance.
UNIVERSAL CAP AND ORDERING RULES IN ADVANCE REFUNDING CONTEXT (SINGLE ISSUE RULE)	Reg. §§ 1.148‑6(b) and 1.148‑1(c).	Tips: – Analyze refunding schedules prepared by underwriter/ municipal advisor; verification report. – Proceeds are only allocable to one issue of bonds at a time; proceeds that also could be replacement proceeds of another issue will be treated only as proceeds of the first issue. – Verify that the escrow funded by the taxable bonds amortizes faster than the taxable bonds amortize, otherwise the “universal cap” rule from Reg. § 1.148‑6(b)(2) could cause the escrow to be de-allocated from the taxable refunding bonds and therefore allocated to replacement proceeds of tax-exempt advance refunded bonds. – If universal cap applies, yield reduction payments may be required to reduce yield on escrow to yield on the refunded bonds. – Escrow investments are “marked to market” at time of de-allocation.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
ECONOMIC SUBSTANCE OF TRANSACTION OR SERIES OF TRANSACTIONS CONTROLS	Reg. § 1.141‑14.   For purposes of the private business use rules, the Commissioner may take any action to reflect the substance of the transaction or series of transactions, including— (1) Treating separate issues as a single issue for purposes of the private activity bond tests; (2) reallocating proceeds to expenditures, property, use, or bonds; (3) reallocating payments to use or proceeds;  (4) measuring private business use on a basis that reasonably reflects the economic benefit in a manner different than as provided in Reg. § 1.141–3(g); and (5) measuring private payments or security on a basis that reasonably reflects the economic substance in a manner different than as provided in Reg. § 1.141–4.	Tip: Consider whether any such other action or transactions, taken together, could be considered to have a principal purpose of transferring to nongovernmental persons (other than as members of the general public) significant benefits of tax-exempt financing in a manner that is inconsistent with the purposes of Section 141.
ABUSIVE ARBITRAGE DEVICES	Reg. § 1.148‑10.   A bond is an arbitrage bond if an abusive arbitrage device is employed with respect to the issue.	Tip: Any action is an abusive arbitrage device if the action has the effect of both— – Enabling the issuer to exploit the difference between tax-exempt and taxable interest rates to obtain a material financial advantage; and – Overburdening the tax-exempt bond market.
/Exploitation of Difference Between Taxable and Tax-Exempt Rates	Reg. §§ 1.148‑10(a)(2)(i) & 1.148‑10(a)(3). See also Reg. § 1.148‑10(e).	Tip: Examples include: (1) investment of a long-duration sinking fund in significantly higher-yielding investments early in the life of the fund, with an attempt to later blend down the yield using lower-yielding investments, or (2) issuing tax-exempt bonds to pay project costs and interest on both those tax-exempt and taxable bonds issued for the same project.
/Financings that Blend Different Yield-Restricted Escrows	Reg. § 1.148‑10(d), Example 2(ii).	Source: Financing schedules, specifically, refunding or debt service comparison schedules and expected escrow cash flow schedules; verification report.   Tips: – Look at the governmental purpose of refunding each refunded issue separately and apply heightened scrutiny to any refunding not being done for a clear purpose (for example, savings, restructuring or covenant relief). – In rising interest rate environment, variations of Example 2 of Reg. § 1.148‑10(d) are often proposed.
/Overburdening the Tax-Exempt Market	Reg. §§ 1.148‑10(a)(2)(ii) and (4). See also Reg. § 1.148‑10(b).	Tips: – Facts and circumstances test. – An important factor in this determination is whether the action would reasonably be taken to accomplish the governmental purpose of the issue if the interest on the issue were not excludable from gross income under Section 103(a) (assuming that the hypothetical taxable interest rate would be the same as the actual tax-exempt interest rate). – One factor evidencing that bonds may remain outstanding longer than necessary is a term that exceeds the safe harbors against the creation of replacement proceeds under § 1.148‑1(c)(4)(i)(B). These factors may be outweighed by other factors, such as bona fide cost underruns, an issuer’s bona fide need to finance extraordinary working capital items, or an issuer’s long-term financial distress.
/Bad Debt Service Structures	Reg. §§ 1.141‑14(b), Example 5; 1.148‑10(d), Examples 2(i) & 3; 1.148‑1(c).   Debt service structures involving unnecessarily long maturities; bond outstanding longer than necessary to accomplish governmental purpose.	Tips: – Comparison of (i) financing schedules showing weighted average maturity of bond issue, and (ii) aggregate useful life of bond-financed projects determined by using relevant asset guidelines (Rev. Proc. 62‑21/ Rev. Proc. 87‑56). – Apply heightened scrutiny to unusual structures such as capital appreciation bonds (CABs), non-amortizing loans or zero coupon bonds; or issues with a weighted average maturity that exceeds 120% of the useful life of the financed projects.
/Bonds Issued Too Early	Reg. §§ 1.148‑10(a)(4) and 1.148‑2(e).	Source: Discuss expenditure expectations at closing. Ask issuer/ borrower for evidence supporting expectations (e.g., copies of project bid specs and bid schedule, project budget and similar items). Review of project fund account statements after closing.   Tips: – Bonds that do not qualify for a temporary period under Reg. § 1.148‑2(e)(2), (e)(3), or (e)(4) may be considered to be issued too early. – Failure to have meaningful supporting documentation may raise questions about expected expenditure timeframe.
/Possible Treatment of Taxable Bonds as Part of a Single Issue with Tax-Exempt Bonds	Reg. § 1.150‑1(c)(2) (limitation on “window maturity” or unreasonable allocations of bonds)   Reg. § 1.148‑10(a) (general prohibition on abusive arbitrage devices)   Abuse found in TAM 9746001 where “freed-up” revenues that would otherwise have been used to pay debt service on the refunded bonds were invested at a yield in excess of the yield of the refunding bonds and where debt service on the refunding bonds was structured to provide for no principal or interest for eight years (i.e., a “window maturity”). See Reg. § 1.148‑10(d), Example 3.	Tips: – Under Reg. § 1.150‑1(c)(2), taxable bonds and tax-advantaged bonds generally are separate issues, but IRS may treat them as a single issue to avoid abuse. – Consider the following: Long-term tax‑exempt advance refunding bonds pay debt service on a prior issue in the early years, and taxable short‑term advance refunding bonds pay debt service in the later years. Proceeds of the taxable refunding issue are invested at a yield higher than the yield on each refunding issue. By separating the two issues, the issuer exploits the difference between the taxable rate at which proceeds of the short-term refunding issue are invested and the tax-exempt rate of the long-term refunding issue. See Example 4 in the General Explanation of the Tax Reform Act of 1986, at page 1215.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
ISSUE PRICE
/For Bonds Issued for Money	Reg. § 1.148‑1(f): General rule for bonds issued for money, issue price is determined by actual sales to the public and is the first price at which 10% of those bonds having the same credit and payment terms (generally, each maturity of an issue) is sold to the public.   See NABL Model Issue Price Documents.	Source: Final numbers; notice of sale, bond purchase agreement and underwriter certifications in public sale; placement agent and/or purchaser certifications in private placement.   Tips: – There are different rules for determining issue price for underwritten competitive deals vs. underwritten negotiated deals vs. private placements (where purchaser is not reoffering bonds). – Review notice of sale for issuer’s requirements if competitive bid qualifications are not met. – For private placements to a purchaser or purchasers, who are not reoffering the bonds to the public, the issue price is the actual price paid by the purchaser or purchasers.
/For Bonds Issued for Property (Exchange)	Reg. § 1.148‑1(f); Sections 1273 & 1274.	Source: Municipal advisor certifications and trade data.   Tips: – Sections 1273 and 1274 govern issue price for purposes of tax-exempt bonds unless otherwise covered in Reg. § 1.148‑1(f). Most of the rules in Reg. § 1.148‑1(f) apply to bonds issued for cash, but the operating rules under Reg. § 1.148‑1(f)(4) apply for bonds issued for property, too. – Keep in mind that what Sections 1273 and 1274 refer to as an “issue” (defined in Reg. § 1.1275‑1(f) as bonds that, among other things “have the same credit and payment terms”), is what we refer to as a “maturity.”
/For Bonds Issued for Property (Other Than Exchange)	Sections 1273 & 1274.	Source: Municipal advisor certifications and trade data.   Tips: – Issue price is determined under Section 1273(b). – Under Section 1273(b)(3), if a debt instrument issued for property is part of an issue a portion of which is traded on an established market, its issue price is the debt instrument’s fair market value on the issue date. Implicitly, fair market value is determined by the trading price on the issue date, assuming there is trading on this date, but this is not explicitly stated. – Whether a debt instrument is publicly traded is governed by Reg. § 1.1273‑2(f). – It is rare for tax-exempt bonds to be treated as “traded on an established market” because a maturity of a tax-exempt bond issue is not treated as traded on an established market unless it has a stated principal amount that exceeds $100 million.
REGISTERED FORM	Sections 103(b)(3) & 149(a)(2); PLR 9128034; PLR 8721034; PLR 8706049.   Applies to registration of “registration required” bonds, which are all bonds other than bonds that (i) are not of the type offered to the public, or (ii) have a maturity of not more than one year.	Source: Underlying bond documentation should specify book-entry or other registration requirements.   Tips: – Obligations for which registration is not required include installment-sale contracts; land sale contracts; settlement agreements. – Bankers are offering new forms of registration for bonds on different platforms – if bypassing DTC, need to verify that bonds are still “registered.”
FILE FORM 8038-G, OR Form 8038-GC	Section 149(e); Reg. § 1.149(e)‑1.	Tips: – Make sure to check IRS website to ensure the most recent form is being used; – Make sure to comply with all of the directions for completing the form; – If transaction is called a “lease agreement,” verify that transaction meets the requirement for a “lease or installment sale” before checking the box. – Make sure that all of your amounts add up.
NO FEDERAL GUARANTEES	Section 149(b); FSA 199904004. Generally, no tax exemption for interest on state and local bonds issued that are directly or indirectly federally guaranteed.   Under Section 149(b), tax exemption is denied to any state and local bond if: (i) the payment of principal of or interest on the bond is guaranteed directly or indirectly by the United States or any agency or instrumentality thereof; (ii) more than 5% of the bond proceeds is used to make loans with respect to which payments of principal or interest are guaranteed by the United States or any agency or instrumentality thereof; or (iii) more than 5% of the proceeds is invested directly or indirectly in federally insured deposits or accounts.	Source: Ask issuer/borrower to verify.   Tips: – There are exceptions contained in Section 149(b) that should be reviewed prior to determining that an issue is or is not federally guaranteed – for example guarantees provided by the Federal Housing Administration (FHA), Veterans Affairs (VA), Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (Ginnie Mae), Student Loan Marketing Association (Sallie Mae or SLM) and Bonneville Power Authority are not treated as federal guarantees. – If leasing a portion of a project to the federal government, review the lease terms to confirm that the federal government is not guaranteeing any portion of the debt service on the issue that financed the project.
BANK QUALIFICATION	Section 265(b)(3).   General requirements: – To be bank qualified, a bond must be a governmental bond, 501(c)(3) bond, or a refunding of certain bonds issued prior to the effective date of Section 265(b)(3) that meet certain requirements. – “Small issuer” limit – issuer must reasonably anticipate that it won’t issue more than $10,000,000 of certain types of tax-exempt bonds in the calendar year. – “Designation” limit – can’t designate more than $10,000,000. – Bonds that are deemed designated or partially deemed designated don’t count toward the $10,000,000 limit.	Tips: – An issuer and all entities that issue obligations on its behalf are treated as a single issuer. So, issuer should make an investigation of all subordinate entities (entities with majority control appointed by issuer’s governing body) that have issued bank-qualified debt. – Counting is very important – consider whether the appropriate measure of bonds is their par amount, their issue price, or the greater of the two. – An issuer and all entities that issue on behalf of such issuer are treated as one issuer (if entity is the main issuer then look down as opposed to up beyond the issuer; however, if an entity is issuing on behalf of the main issuer, need to look up to what the main issuer has issued, what all other entities that issue on behalf of the main issuer have issued, and what subordinate entities have issued). – Determine reasonably expected tax-exempt obligations to be issued in the year it is designating or availing itself of bank-qualified debt.

TOPIC / Subtopic	Law Cite; Summary	Question / Source / Tip Some Historical Context
POST-ISSUANCE COMPLIANCE PROCEDURES	Form 8038‑G (Oct. 2021), Line 43 & 44.	Model Questions:  – Has issuer established written procedures to ensure that all nonqualified bonds of the issue are remediated according to the requirements? – Has issuer established written procedures to monitor the requirements of Section 148?   Tips: – If issuer/ borrower has its own procedures, ask for such procedures and consider including them as an exhibit to tax documentation. – The Code does not require any such policy. However, Form 8038‑G asks a yes/no question if the issuer has such a policy. Checking “No”may invite an audit. – Many issuers/ borrowers remain in compliance even if they do not have formal written post-issuance compliance manuals. – Many issuers/ borrowers have found, however, that having such written procedures is very helpful to maintain compliance. – In the case of conduit issuers, the issuer often delegates almost all required actions and review to the borrower. – Lore is that more favorable treatment is given in VCAP if have established procedures and mark it on Form 8038‑G.   Context: Shortly after the American Reinvestment and Recovery Act of 2009 (ARRA) was enacted, which brought with it Build America Bonds (BABs) and certain other tax credit bonds, the IRS began issuing voluntary questionnaires to tax credit bond issuers, some of which asked whether the issuer had compliance procedures. VCAP resolution standards also used to provide specifically for more favorable settlements for issuers who had procedures in place.
RECORD RETENTION	Published on the IRS website (August 2022): “For certain federal tax purposes, a refunding bond issue is treated as replacing the original new money issue. To this end, the tax-exempt status of a refunding issue is dependent upon the tax-exempt status of the refunded bonds. Thus, certain material records relating to the original new money issue and all material records relating to the refunding issue should be maintained until three years after the final redemption of both bond issues.”	Tips: – Consider addressing these items with issuer/ borrower because these rules may be different than state and local-mandated document retention policies. – Bond counsel may consider retaining documents relating to the bonds (and any refunded bonds) sufficient to establish compliance with (i) initial expectations regarding the investment and expenditure of proceeds and any qualified equity; (ii) expected scope of construction and use of the project (management contracts/ leases, etc.); (iii) permitted sources of payment or security; and (iv) arbitrage and rebate requirements applicable to the issue.