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).