rp-02-31.pdf

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Part III

Administrative, Procedural, and Miscellaneous

26 CFR 1.148-10: Anti-abuse rules and Authority of Commissioner.
(Also Part I, §§ 103, 148, 1.148-1, 148-2, 148-6)

Rev. Proc. 2002-31

SECTION 1. PURPOSE

This final revenue procedure sets forth a safe harbor under
which an issue of tax or revenue anticipation bonds will not be
treated as outstanding longer than is reasonably necessary to
accomplish the governmental purposes of the bonds for purposes of
§ 1.148-10(a)(4) of the Income Tax Regulations. On August 20,
2001, this revenue procedure was published in proposed form as
Notice 2001-49, 2001-34 I.R.B. 188. Public comments were invited
concerning the proposed revenue procedure and none were received.
This final revenue procedure is unchanged from the proposed
revenue procedure.

SECTION 2. BACKGROUND

01. Section 103(a) of the Internal Revenue Code of 1986
provides that, except as provided in section 103(b), gross income
does not include interest on any state or local bond.

02. Section 103(b) provides that the exclusion described in
section 103(a) does not apply to any arbitrage bond.

03. Section 148(a) provides that an arbitrage bond is any
bond issued as part of an issue any portion of the proceeds of
which are 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.

04. Section 148(c)(1) provides that a bond will not be
treated as an arbitrage bond solely by reason of the fact that
the proceeds of the issue of which such bond is a part may be
invested in higher yielding investments for a reasonable
temporary period until such proceeds are needed for the purpose
for which such issue was issued.

05. Section 1.148-2(e)(3)(i) of the Income Tax Regulations

provides that the proceeds of an issue that are reasonably
expected to be allocated to restricted working capital
expenditures within 13 months after the issue date qualify for a
temporary period of 13 months beginning on the issue date.

06. Section 1.148-2(e)(3)(ii) provides that if an 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 2 years after the issue date or
60 days after the last date for payment of those taxes without
interest or penalty, the temporary period under § 1.148-
2(e)(3)(i) is extended until the maturity date of the issue.

07. Section 1.148-1(b) provides that restricted working
capital expenditures are working capital expenditures that are
subject to the proceeds-spent-last rule in § 1.148-6(d)(3)(i) and
are ineligible for any exception to that rule.

08. Section 1.148-10(a)(1) provides that bonds of an issue
are arbitrage bonds if an abusive arbitrage device under § 1.148-
10(a)(2) is used in connection with the issue.

09. Section 1.148-10(a)(2) provides that any action is an
abusive arbitrage device if the action has the effect of (i)
enabling the issuer to exploit the difference between tax-exempt
and taxable interest rates to obtain a material financial
advantage and (ii) overburdening the tax-exempt bond market.

10. Section 1.148-10(a)(4) provides that 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.

11. Under § 1.148-10(a)(4), 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). This factor may be
outweighed by other factors, however, such as long-term financial
distress.

12. Section 1.148-1(c)(4)(i)(A) provides that certain
replacement proceeds arise to the extent that the issuer
reasonably expects as of the issue date that the term of the
issue will be longer than is reasonably necessary for the
governmental purposes of the issue and that 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 § 1.148-10.

13. Section 1.148-1(c)(4)(i)(B)(1) provides a safe harbor
against the creation of replacement proceeds under § 1.148-
1(c)(4)(i)(A) for the portion of an issue that finances

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restricted working capital expenditures. This safe harbor is met
if that portion is not outstanding longer than 2 years.

14. Section 1.148-1(c)(4)(i)(B)(2) provides a safe harbor
against the creation of replacement proceeds under § 1.148-
1(c)(4)(i)(A) for the portion of an issue (including a refunding
issue) that finances or refinances capital projects. This safe
harbor is met if that portion has a weighted average maturity
that does not exceed 120 percent of the average reasonably
expected economic life of the financed capital projects.

15. Section 1.148-10(d) contains examples illustrating the
application of the anti-abuse rules of § 1.148-10. Example 2(i)
describes a particular transaction in which an issue is deemed to
have a longer weighted average maturity than necessary,
notwithstanding that the issue satisfies the safe harbor against
the creation of replacement proceeds in § 1.148-1(c)(4)(i)(B)(2).

SECTION 3. SCOPE

This revenue procedure applies to an issue of tax or revenue
anticipation bonds the proceeds of which qualify for a temporary
period for restricted working capital expenditures under § 1.148-
2(e)(3).

SECTION 4. SAFE HARBOR

For purposes of § 1.148-10(a)(4), an issue of tax or revenue
anticipation bonds within the scope of this revenue procedure
will not be treated as outstanding longer than is reasonably
necessary to accomplish the governmental purposes of those bonds
if the final maturity date of the issue is not later than the end
of the applicable temporary period under § 1.148-2(e)(3)(i) or
§ 1.148-2(e)(3)(ii) for which proceeds of the issue qualify.
This revenue procedure does not apply to determine whether an
issue of tax or revenue anticipation bonds meets the other
requirements of section148.

SECTION 5. ADVANCE RULINGS

The Service will consider requests for rulings on proposed
issues of tax or revenue anticipation bonds that do not satisfy
the safe harbor provided in section 4.

SECTION 6. EFFECTIVE DATE

This revenue procedure applies to tax or revenue
anticipation bonds sold after May 13, 2002.

DRAFTING INFORMATION

The principal authors of this revenue procedure are Rose M.
Weber and Timothy L. Jones of the Office of the Division
Counsel/Associate Chief Counsel (Tax Exempt and Government

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Entities). However, other personnel from the IRS and Treasury
Department participated in the development of this revenue
procedure. For further information regarding this revenue
procedure contact Rose M. Weber or Timothy L. Jones on (202) 622-
3980 (not a toll-free call).

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