Treasury Regulation §1.150-2, issued pursuant to Section 150 of the Internal Revenue Code of 1986, as amended, prescribes certain requirements by which proceeds of tax-exempt bonds, notes, certificates or other obligations included in the meaning of “bonds” under Section 150 of the Code used to reimburse advances made for Capital Expenditures paid before the issuance of such Obligations may be deemed “spent” for purposes of Sections 103 and 141 to 150 of the Code and therefore, not further subject to any other requirements or restrictions under those sections of the Code.
Such Reimbursement Regulations require that the Issuer make a Declaration of Official Intent to reimburse any Capital Expenditure paid prior to the issuance of the Obligations intended to fund such Capital Expenditure and require that such Declaration of Official Intent be made no later than 60 days after payment of the Capital Expenditure and further require that any Reimbursement Allocation of the proceeds of such Obligations to reimburse such Capital Expenditures occur no later than 18 months after the later of the date the Capital Expenditure was paid or the date the property acquired with the Capital Expenditure was placed in service, except that any such Reimbursement Allocation must be made no later than three years after such Capital Expenditure was paid.
Discussion of certain frequent related matters:
What is the significance of the reimbursement rules?
The general federal tax law is that no reimbursements from bond proceeds are permitted for capital expenditures made prior to the issuance of the bonds unless certain procedures have been followed. The point of the reimbursement rules, therefore, is to set forth the circumstances in which use of proceeds of bonds constitutes a valid “expenditure” of bond proceeds, reducing the amount of unspent bond proceeds, or as summarized by Frederic Ballard in his 2011 edition of the ABCs of Arbitrage, a “reimbursement that complies with the regulations has the effect of moving the reimbursement amount outside the arbitrage rules.”
A reimbursement allocation (i.e., use of bond proceeds to pay expenditures made before the issue date) is treated as a valid “expenditure” of bond proceeds for the governmental purpose of the original expenditure on the date of the reimbursement allocation only if the requirements listed in Treas. Reg. 1.150-2(d) are met:
- Issuer must have adopted an official intent for the original expenditure; and
- The reimbursement allocation must be made not later than 18 months after the later of (a) the date the original expenditure was paid or (b) the date the project is placed in service or abandoned. Note: In any case, the reimbursement allocation must be made not more than 3 years after the original expenditure is paid.
What is a reasonable deviation from the project description under Treas. Reg. 1.150-2(e)(2)(iii):
Can a reimbursement resolution be used to cover capital expenditures relating to more than one series of bonds:
Yes, so long as the project is defined properly to encompass the project being financed with the multiple series of bonds. Be careful to examine the capital expenditures to be reimbursed. Those expenditures must fit within the “reimbursement period” definition described in (d)(2).
May issuer make a reimbursement allocation after the closing?
Yes. See the discussion under the first question.
Once financed, not reimbursed:
Section 1.150-2(g)(1) provides that a reimbursement allocation is not treated as an expenditure of proceeds if the allocation is to pay principal or interest on an obligation or to reimburse an original expenditure paid by another obligation. Such allocation is instead analyzed as a refunding.
In PLR 9417027, the Issuer issued a bond anticipation note. Before the maturity of the note, the finance director died. The Issuer used other moneys to redeem the note upon maturity with general fund moneys and subsequently issued bonds to reimburse the general fund and finance additional project costs. While the bonds technically did not constitute refunding bonds because the proceeds were not used for debt service (and should have been tested as new money bonds), the IRS permitted refunding treatment considering the facts and circumstances.
Is a capital expenditure on the closing date, reimbursed on the closing date a “Reimbursement”?
Assume on Day 1, the issuer wires its own money to a seller of property to purchase a new facility. Later in the day on Day 1, the issuer issues its new money bonds for the purpose of financing the purchase of such facility and receives the purchase price for the bonds. Is the initial wire to the seller an “original expenditures” with respect to which the bonds are reimbursement bonds? Most bond counsel would probably find that the bond is not a reimbursement bond – for all intents and purposes, the bond proceeds were used to finance the purchase. Some bond counsel might even consider payment one or two days in advance a new money and not a reimbursement situation.
What is the De Minimis Exception?
The official intent requirement and the reimbursement period requirement do not apply to costs of issuance of any bond or to an amount not to exceed the lesser of $100,000 or 5% of the proceeds of an issue.
(Fundamental of Municipal Bond Law – 2007 and Treas. Reg. 1.150-2(f))
What this means is that the special exception for preliminary expenditures also applies to non-preliminary expenditures so long as the total of that non-preliminary expenditure reimbursement is the lesser of those two numbers, or if the reimbursement is used to pay costs of issuance for any bond. For instance, if the proceeds of an issue amount to $6,000,000, the de minimis limitation of $100,000 applies, and the borrower may request a reimbursement up to that amount for expenditures that would not otherwise satisfy the official intent requirement (no later than 60 days after the date of payment) or the reimbursement period requirement (allocation no later than 18 months after etc.), or both requirements. But note that all other requirements of the reimbursement rules must be met. It is simply the case that these two requirements (in (d)(1) and (d)(2) of the regulations) do not apply. Notiz 20111227.
Do the same reimbursement rules apply to qualified tax credit bonds?
No. There are separate reimbursement rules and requirements for these types of bonds. See, e.g., the rules relating to New Clean Renewable Energy Bonds.
Are there special rules for disaster area bonds?
Yes. See Notice 2010-10 regarding special reimbursement rules for disaster area bonds.
Can Prior Working Capital Expenditures be Reimbursed under the normal De Minimis Related Working Capital Expenditure Rule?
Assume a previously paid expenditure is not capitalized into the cost of the project but is instead working capital directly related to capital expenditures financed by the issue. If the expenditure is incurred post-issuance and then paid from bond proceeds, the expenditure could fall within the exception in Treas. Reg. 1.148-6(d)(3)(ii)(A)(5) if the total of such expenditures does not exceed 5 percent of the sale proceeds of the issue. However, assume such expenditure was paid prior to the bond issuance. May there be a reimbursement to the issuer for the expenditure? No, not under the 148 regulations. The reimbursement regulations (Treas. Reg. 1.150-2(d)(3)) state that the expenditure must be either a capital expenditure, a cost of issuance for a bond, an expenditure for certain extraordinary working capital items, a grant, a qualified student loan, a qualified mortgage loan or a qualified veterans’ mortgage loan – but not for a de minimis working capital expenditure. Solution: Either (1) get an accountant to state that the cost is capitalized into the cost of the project – in other words, get the accountant to determine that it actually is a capital expenditure, or (2) there is no second solution.
Timing example, and what happens when a reimbursement resolution becomes stale:
The special rules relating to the reimbursement period requirement have the following significance: Assume a capital expenditure was paid on March 1, 2009 for a construction project that was not placed in service until March 1, 2011, and the issuer (or conduit borrower, in the case of qualified 501(c)(3) bonds) adopted a reimbursement resolution (the official intent) on April 30, 2009, the issuer or borrower may use bond proceeds to be reimbursed for such expenditure as late as March 1, 2012 (provided the allocation of proceeds to the March 1, 2009 expenditure is made no later than March 31, 2012). Reimbursement allocations during this period may be made from one or more bond issues. However, once the reimbursement period has expired with respect to a prior expenditure, the issuer or conduit borrower, as applicable, may no longer be reimbursed for such capital expenditure, unless (1) a subsequent reimbursement resolution (official intent) was adopted within 60 days of payment of the original expenditure, (2) the de minimis exception applies to the expenditure or (3) the preliminary expenditure exception applies to the expenditure.
Does the reimbursement rule apply for reimbursements from taxable bond proceeds:
The reimbursement rules apply in connection with reimbursements paid with proceeds of a taxable bond. See, e.g., PLR 200116004.
Example of the One-Year Step Transaction Anti-Abuse Rule:
An example of a transaction possibly violating the one-year step transaction rule is (1) the issuance of new money bonds, (2) reimbursement from bond proceeds, and (3) within one year, funding a cash defeasance to defease or discharge prior bonds. Could this situation be recharacterized as the use of bond proceeds to fund the escrow (and the reimbursement allocation would therefore not constitute an expenditure of proceeds)? The bonds would therefore be refunding bonds. See Treas. Reg. 1.150-2(h)(2).