Qualified Administrative Costs (Treas. Reg. § 1.148-5)

General Overview:

The basic rule is that an allocation of gross proceeds of an issue to a payment or a receipt on an investment is not adjusted to take into account any costs or expenses paid, directly or indirectly, to purchase, carry, sell or retire the investment (“administrative costs”).  Therefore, administrative costs do not increase the payments for, or reduce the receipts from, investments, and thus do not affect the computation of yield on such investments.  There are separate rules, however, for nonpurpose investments (Treas. Reg. 1.148-5(e)(2)) and purpose investments (Treas. Reg. 1.148-5(e)(3)) under which certain administrative costs (“qualified administrative costs”) may nonetheless be included in computing yield on the investment.

Rules for Nonpurpose Investments.  Qualified administrative costs can be taken into account.  Qualified administrative costs for this purpose are reasonable, direct administrative costs, other than carrying costs, such as separately stated brokerage or selling commissions, but not indirect costs such as legal and accounting fees and record keeping or custodial costs.  General overhead costs and similar indirect costs of the issuer such as employee salaries and office expenses and costs associated with computing the rebate amount are not qualified administrative costs.  Administrative costs are not reasonable unless they are comparable to administative costs that would be charged for the same investment or a reasonably comparable investment if acquired with a source of funds other than gross proceeds of tax-exempt bonds.  There are special rules for administrative costs of (1) nonpurpose investments in certain RICs and commingled funds, (2) guaranteed investment contracts and (3) investments purchased for a yield restricted defeasance escrow.  For a description of the special rules for guaranteed investment contracts and investments purchased for a yield restricted defeasance escrow, see the heading “Special Rules for GIC and Defeasance Escrow” below.

Rules for Purpose Investments.  Qualified administrative costs paid by the conduit borrower may be taken into account.  These costs increase the payments for, or decrease the receipts from, the purpose investments.  This rule applies even if the payments simply reimburse the issuer.  A pro rata portion of each payment made by the conduit borrower is treated as a reimbursement of reasonable administrative costs, if the present value of those payments does not exceed the present value of the reasonable administrative costs paid by the issuer, using the yield on the issue as the discount rate.  For purpose investments, qualified administrative costs means:

  1. costs or expenses paid, directly or indirectly, to purchase, carry, sell or retire the investment; and
  2. costs of issuing, carrying or repaying the issue, and any underwriters’ discount.

While the first sentence in the regulation and shown above refers to payment by the conduit borrower, the payment can be by the issuer, as passed through to the conduit borrowers.

Special Rules for GIC and Defeasance Escrow:

The maximum amount of qualified administrative costs for GICs or investments purchased for a yield restricted defeasance escrow that may be taken into account in 2010 is set forth by the IRS in Section 3 of Rev. Proc. 2009-50:

.18 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar year 2010, under § 1.148-5(e)(2)(iii)(B)(1), a broker’s commission or similar fee for the acquisition of a guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified administrative cost does not exceed the lesser of (A) $35,000, and (B) 0.2 percent of the computational base (as defined in § 1.148-5(e)(2)(iii)(B)(2)) or, if more, $4,000; and (2) the issuer does not treat more than $100,000 in brokers’ commissions or similar fees as qualified administrative costs for all guaranteed investment contracts and investments for yield restricted defeasance escrows purchased with gross proceeds of the issue.

For 2011, that amount is set forth by the IRS in Section 3 of Rev. Proc. 2010-40:

.12 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow.  For calendar year 2011, under § 1.148-5(e)(2)(iii)(B)(1), a broker’s commission or similar fee for the acquisition of a guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified administrative cost does not exceed the lesser of (A) $36,000, and (B) 0.2 percent of the computational base (as defined in § 1.148-5(e)(2)(iii)(B)(2)) or, if more, $4,000; and (2) the issuer does not treat more than $101,000 in brokers’ commissions or similar fees as qualified administrative costs for all guaranteed investment contracts and investments for yield restricted defeasance escrows purchased with gross proceeds of the issue.

For 2012, that amount is set forth by the IRS in Section 3 of Rev. Proc. 2011-52:

.18 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar year 2012, under § 1.148-5(e)(2)(iii)(B)(1), a broker’s commission or similar fee for the acquisition of a guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified administrative cost does not exceed the lesser of (A) $37,000, and (B) 0.2 percent of the computational base (as defined in § 1.148-5(e)(2)(iii)(B)(2)) or, if more, $4,000; and (2) the issuer does not treat more than $103,000 in brokers’ commissions or similar fees as qualified administrative costs for all guaranteed investment contracts and investments for yield restricted defeasance escrows purchased with gross proceeds of the issue.

For 2013, that amount is set forth by the IRS in Section 3 of Rev. Proc. 2012-41:

.10 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar year 2013, under § 1.148-5(e)(2)(iii)(B)(1), a broker’s commission or similar fee for the acquisition of a guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified administrative cost does not exceed the lesser of (A) $37,000, and (B) 0.2 percent of the computational base (as defined in § 1.148-5(e)(2)(iii)(B)(2)) or, if more, $4,000; and (2) the issuer does not treat more than $106,000 in brokers’ commissions or similar fees as qualified administrative costs for all guaranteed investment contracts and investments for yield restricted defeasance escrows purchased with gross proceeds of the issue.

For 2014, that amount is set forth by the IRS in Section 3 of Rev. Proc. 2013-35:

.22 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar year 2014, under § 1.148-5(e)(2)(iii)(B)(1), a broker’s commission or similar fee for the acquisition of a guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified administrative cost does not exceed the lesser of (A) $38,000, and (B) 0.2 percent of the computational base (as defined in § 1.148-5(e)(2)(iii)(B)(2)) or, if more, $4,000; and (2) the issuer does not treat more than $108,000 in brokers’ commissions or similar fees as qualified administrative costs for all guaranteed investment contracts and investments for yield restricted defeasance escrows purchased with gross proceeds of the issue.

For 2015, that amount is set forth by the IRS in Section 3 of Rev. Proc. 2014-61:

.23 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar year 2015, under § 1.148–5(e)(2)(iii)(B)(1), a broker’s commission or similar fee for the acquisition of a guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified administrative cost does not exceed the lesser of (A) $39,000, and (B) 0.2 percent of the computational base (as defined in § 1.148–5(e)(2)(iii)(B)(2)) or, if more, $4,000; and (2) the issuer does not treat more than $110,000 in brokers’ commissions or similar fees as qualified administrative costs for all guaranteed investment contracts and investments for yield restricted defeasance escrows purchased with gross proceeds of the issue.

For 2016, that amount is set forth by the IRS in Section3 of Rev. Proc. 2015-53:

.23 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar year 2016, under § 1.148–5(e)(2)(iii)(B)(1), a broker’s commission or similar fee for the acquisition of a guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified administrative cost does not exceed the lesser of (A) $39,000, and (B) 0.2 percent of the computational base (as defined in § 1.148–5(e)(2)(iii)(B)(2)) or, if more, $4,000; and (2) the issuer does not treat more than $110,000 in brokers’ commissions or similar fees as qualified administrative costs for all guaranteed investment contracts and investments for yield restricted defeasance escrows purchased with gross proceeds of the issue.

For 2017, that amount is set forth by the IRS in Section 3 of Rev. Proc. 2016-55:

.23 Safe Harbor Rules for Broker Commissions on Guaranteed Investment Contracts or Investments Purchased for a Yield Restricted Defeasance Escrow. For calendar year 2017, under § 1.148–5(e)(2)(iii)(B)(1), a broker’s commission or similar fee for the acquisition of a guaranteed investment contract or investments purchased for a yield restricted defeasance escrow is reasonable if (1) the amount of the fee that the issuer treats as a qualified administrative cost does not exceed the lesser of (A) $39,000, and (B) 0.2 percent of the computational base (as defined in § 1.148–5(e)(2)(iii)(B)(2)) or, if more, $4,000; and (2) the issuer does not treat more than $111,000 in brokers’ commissions or similar fees as qualified administrative costs for all guaranteed investment contracts and investments for yield restricted defeasance escrows purchased with gross proceeds of the issue.

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