Replacement Proceeds

August 9, 2012

General Discussion

“Replacement Proceeds” is defined in Treas. Reg. 1.148-1(c).  Certain safe harbors apply.

A representation by an issuer included in the tax documents to the effect that debt service on refunding bonds is scheduled such that debt service on all obligations of the issuer produces substantially level debt service is intended to counter any arguments that any debt service “windows” for the refunding bonds potentially create replacement proceeds concerns.

“Other replacement proceeds” under Treas. Reg. 1.148-1(c) arise when the issuer reasonably expects as of the issue date that (1) the term of the 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.  There is a safe harbor for determining whether the term is too long.  Note that “available amounts” refers to amounts that would be available to pay working capital expenditures, not capital expenditures.  See FSA 001678 (Jan. 31, 2004).

Permanent Funds

PLR 8322020 in which a Pennsylvania fund was found not to be replacement proceeds.  Fund consisted of a trust created by an entity wholly unrelated to the bond issuer.

PLR 200428022 in which what seems to be an Arizona fund was found not to be replacement proceeds.  Fund was created more than 90 years before the plan of financing relating to the bonds.

Treas. Reg. 1.148-11:  The Texas exception for permanent funds is in Treas. Reg. 1.148-11(d) which sets forth the requirements for certain covered perpetual trust funds. Among other things, (i) substantially all of the corpus of the fund must consist of nonfinancial assets, revenues derived from those assets, gifts and bequests, (ii) the fund corpus may be invaded only to support specifically designated essential governmental functions carried on by a subdivision with general taxing powers, (iii) substantially all of the available income of the fund is required to be applied annually to support the designated functions, (iv) the issue of bonds guaranteed consists of general obligation bonds that are not private activity bonds substantially all of the proceeds of which are to be used for the designated functions, (v) the fund satisfies the requirements in (i) through (iii) on August 16, 1986 and (vi) the guarantee is not attributable to a deposit to the fund after May 14, 1989.

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