Hello, my name is Christina Easter, and I am a Revenue Agent in Field Operations of the Tax-Exempt Bonds Office of the IRS.

We welcome you and appreciate you taking the time to listen to this IRS webinar for conduit issuers of tax-advantage bonds.

This is part two, Conduit Issuer Responsibilities, of a three-part series for conduit issuers of tax-exempt financing.

This module focuses on some of the responsibilities conduit issuers have in ensuring, compliance necessary to retain the tax-advantage status of the bonds they issue.

You can also review the other two modules, an Overview of Conduit Issuer Responsibilities, and Policy and Procedural Considerations.

Please keep in mind that this presentation is part of the IRS's education and outreach efforts.

It is not intended as official guidance, and should not be relied upon as such.

This presentation summarizes some of the rules applicable to qualified private activity bonds.

The presentation focuses on the conduit issuer's role, and is intended to summarize various provisions, as such please refer to applicable legal authorities in their entirety before implementing compliance strategies related to tax-exempt financing.

Conduit issuers are state and local governments who issue tax-exempt financing for the purpose of making loans to governmental, and non-governmental, entities, for a qualified purpose.

Conduit issuers are responsible for insuring compliance with the code section under which the financing arrangement was issued, as well as additional code and treasury regulation sections.

Compliance starts on, or before, the date of issuance, and ends on final maturity, unless the bonds are redeemed early.

Publication 5005, Your Responsibilities as a Conduit Issuer of Tax-Exempt Bonds, provides a great overview of these responsibilities.

Each specific type of qualified bond has its own set of rules spelled out under the Internal Revenue Code.

I will cover some highlights of the types of qualified bonds conduit issuers may issue.

Exempt facility bonds under IRC section 142, in which 95 percent or more of the net proceeds are to be used to finance airports, water sewage and solid waste facilities, residential rental projects, public educational facilities, and facilities that provide local electric energy or gas.

See IRC section 142 for a complete list of types of exempt facilities, as well as which facilities must be owned by the government, safe harbor rules for leases and management contracts, and other requirements.

Mortgage revenue bonds, under IRC section 143, in which all the proceeds of the issue, except those allocated to cost of issuance and a reasonably required reserve, are used to finance owner-occupied residences.

The private business tests in IRC section 141 are not met, repayment of principal is timely, and the requirements of sub-section (c) through (i) and (m)(7) are met.

Small issue bonds, under IRC section 144A, in which the face amount of the issue is one million dollars or less, and 95 percent or more of the net proceeds are used to acquire, construct, or improve land or property that is subject to the allowance for depreciation.

See the code section for additional rules, particularly the ones dealing with [inaudible] the [Inaudible] of face amount of the issuance, capital expenditures not taken into account, and refinancing.

Student loan bonds, under IRC section 144B, in which 90 percent or more of the net proceeds are to be used to make or finance student loans under the Higher Education Act of 1965, or 95 percent of the net proceeds are used to make or finance student loans pursuant to a program of general application approved by the state.

In addition, a student loan bond will become disqualified if it meets the private business test in IRC section 141.

Redevelopment bonds, under IRC section 144C, in which 95 percent or more of the net proceeds are to be used for one, or more, redevelopment purposes in any designated blighted area.

See this code section for additional requirements, use of proceeds requirements, land restriction requirements, and definition of the terms redevelopment purposes, designated blighted area, and financed area.

501c3 bonds, under IRC section 145, in which 95 percent, or more, of the net proceeds are to be used to finance property which is owned by a 501c3 organization, or a governmental unit, and the private business test in IRC section 141 are not met.

This code section also covers qualified hospital bonds.

See this code section for all the rules pertaining to 501c3 bonds, and qualified hospital bonds.

In addition to complying with the rules of the code section, under which qualified bonds are issued, conduit issuers must insure the requirements of IRC section 146 through 149, and Treasury regulation section 1.150-2 are also met.

Some of the important provisions of these sections are briefly discussed below.

As stated in the overview module, please review all of the specific type of bonds requirements before issuing bonds.

Volume Cap limits the amount of certain bonds conduit issuers can issue in a calendar year, and allow unused volume cap to be carried forward for three years, using form 8328.

Once the carry forward election is made, contact the Compliance Program Management unit of the Tax-Exempt Bond Office, to request revocation of this election.

Volume cap does not apply to certain refundings, exempt facility bonds used to finance government owned airports, docks, and wharfs, and 501c3 bonds.

Code section 147A through G contains other requirements that apply to private activity bonds in which conduit issuers are responsible for ensuring compliance.

The substantial user requirement of the 147A disqualifies a private activity bonds tax-advantaged status for any period a substantial user, or person related to that user, holds the bonds which finance the project.

Under 147B, the average maturity of a private activity bond may not exceed 120 percent of the average economic life of the facility financed with the bond proceeds.

The limitation in section 147C limits land acquisition to no more than 25 percent of the net proceeds for acquisition of land.

IRC section 147B, prohibits net proceeds from being used to acquire existing land, or an interest in land, unless the first use would be the project to be financed with the bond proceeds.

The public approval requirements, under 147F, provides that an applicable elected representative of the conduit issuer must approve the bonds after giving reasonable notice of a hearing for issuing the bonds, or after a voter referendum.

Approval by an elected representative is not required in certain re-funding if the average maturity of the re-funding bonds is not later than the average maturity of the bonds to be re-funded.

The restriction on issuance costs, under 147G, limits the costs of issuing the bonds to no more than two percent of the proceeds.

The issuer may use other sources of funds to pay issuance costs which exceed two percent of proceeds.

Review IRC section 147, when issuing private activity bonds, since some rules will not apply to all exempt facility bonds.

The arbitrage rule requires that the conduit issuer certify reasonable expectations, as of the issue date, regarding the amount and use of the gross proceeds.

Gross proceeds mean proceeds and replacement proceeds.

Proceeds include sale proceeds, investment proceeds, and transferred proceeds.

Proceeds are generally invested from the issue date through completion of the project while waiting to be used to pay costs of the project.

The arbitrage rules establish temporary periods during which proceeds allocated to capital projects can be invested without causing the bond to be arbitrage bonds.

See lesson five, Arbitrage and Rebate, under the Tax-Exempt bonds training material phase one training text.

The length of the temporary period depends on the amount and purpose of the issuance.

The arbitrage rules in the Treasury regulations sets out detailed rules for restricting the yield on investments, and rebating excess investment earnings to the US Treasury.

The yield restriction rule limits the amount of investment earnings after a temporary period.

In certain cases, a yield reduction payment may be permitted to reduce the yield on investments so that the investment yield is not materially higher than the yield on the bonds.

The rebate rules require investment earnings, which exceed the yield on the bonds, to be remitted to the US Treasury.

The first rebate installment payment must be made for a computation date that is not later than five years after the issue date.

Yield reduction payments, if permitted, are also due on or before the date rebate installment payments are due.

Failure to pay rebate, or make a yield reduction payment when required will cause the bonds to be arbitrage bonds.

In some cases, to avoid the loss of tax-exemption, a penalty equal to 50 percent of the rebate amount, plus interest at the under-payment rate, can be paid when the failure is not due to willful neglect.

Form 8038-T must be filed to make a rebate payment, yield reduction payment, or pay a penalty in lieu of loss of tax-exemption.

Yield reduction payments and rebate payments can be avoided all together if the proceeds are to be used to finance construction expenditures in accordance with spending requirements that require specified percentages of the gross proceeds be allocated to expenditures within specified timeframes after the issue date.

For example, under the two year spending exception, the rebate requirement is met if ten percent of the gross proceeds are allocated to expenditures within six months, 45 percent of gross proceeds are allocated to expenditures within one year, 75 percent of gross proceeds are allocated to expenditures within 18 months, and 100 percent of gross proceeds are allocated to expenditures within two years of the issue date.

Conduit issuers should ensure that the bonds they issue which are offered to the public, are registered per section 149A, payment of principle and interest on tax-advantage bonds is not guaranteed by the Federal Government, per section 149B, and qualified activity bonds, other than 501(c)(3) bonds, are not advance refunded.

IRC section 149B provides that an advance refunding occurs when a bond is issued to redeem a prior issue, and the proceeds are spent for this purpose more than 90 days after issuance.

IRC section 149E requires that the conduit issuer of an exempt facility bond file an information return, form 8038 to report the issuance.

Form 8038 includes identifying information of the conduit issuer, the name, type, and terms of the bond issuance, volume cap information, and expenditure expectations.

Under Treasury regulation 1.150-2, a conduit issuer can issue bonds, and use the proceed to reimburse itself for qualified expenditures made during a reimbursement period prior to issuance, if it one, adopts an official attempt to do so not later than 60 days after payment of the expenditure, and two, allocates the proceeds to the expenditures within 18 months after the later of the date of the original expenditure, or the date the project is placed in service, but not later than three years after the original expenditure.

For example, a conduit issuer issues bonds to construct a project If it wants to use bond proceeds to reimburse itself for these expenditures, the board of the issuer must adopt a resolution to that effect at least 60 days after the expenditure was paid, and then allocate the bond proceeds to the prior expenditures within 18 months after the date of the original expenditure, or the date the project is placed in service.

In no event can there be a proper reimbursement allocation that is more than three years after the original expenditure.

Conduit issuers should help make sure that records are retained which can demonstrate that the bonds they issue comply with applicable Federal laws.

They should maintain records on, or before, the issue date of the bonds, and continue to their final maturity or redemption.

Preparing and maintaining records for bond financed facilities is crucial to demonstrating that interest on a governmental bond is excludable from Federal Income Tax, or meets the requirements of tax-advantaged financing.

This completes part two of this series for conduit issuers of tax-exempt financing.

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You may find other information about the IRS at irs.gov.

Once you're on the main website, find the information for a link on the upper right-hand corner, and then select the tax-exempt bonds link in the drop-down box.

This brings you to the main page for tax-exempt bonds.

We have a lot of useful information for issuers of tax-advantaged bonds, as well as other participants in the tax-advantage bond market.

If you have not already done so, please review the other two modules in this series, as well.

Part one provides an overview of conduit issuers of tax-exempt financing, and part three covers policy and procedural considerations.

We hope you found this information to be helpful in understanding your responsibilities.

Thank you for taking the time to listen.