Pooled Financing Bonds (I.R.C. 149(f)(4)(A))

General Discussion:

An issuer may decide to issue tax-exempt bonds for the purpose of making loans to two or more conduit borrowers.  Borrowers may be governmental entities, section 501(c)(3) organizations or private businesses.  Borrowers are generally interested in these types of financings because the pooling of proceeds may reduce issuance costs and lower interest rates.

Special tax rules may apply when bonds are issued to make loans to two or more conduit borrowers.  The rules result from the concern that tax-exempt bonds not be issued substantially in advance of when the proceeds are actually needed by the borrowers.  Other rules reflect the belief that pooled bond issuers should not unduly benefit from their issuance of the bonds on behalf of the ultimate consumers (the borrowers) of the proceeds.

There are special non-arbitrage limitations, arbitrage limitations, rebate rules and refunding rules for pooled financings.

Non-Arbitrage Limitations:

See I.R.C. 149(f), 149(g), 147(b)

Exceptions to Rebate:

There are certain special rules for pooled financings, including the rules described below.

With respect to the six-month spending exception to rebate, the six-month period for pooled financings begins on the issue date of the pool bonds (not on the date of the loan to the borrower).  Therefore, the gross proceeds are not treated as “spent” for purposes of the spending exception until the gross proceeds are spent for their ultimate purposes (rather than on the making of a loan).  Under Treas. Reg. § 1.148-7(b)(6), the pooled bond issuer may elect (on or before the issue date) to apply the spending requirements separately to each loan to a conduit borrower, as discussed in the next paragraph.  If the election is made and proceeds are loaned to the ultimate borrower, the six-month spending period begins for the loan on the earlier of (1) the date the loan is made or (2) the date 12 months from the issue date of the pooled bonds.

For purposes of the two-year construction spending exception to rebate, special rules provide that the Available Construction Proceeds (ACP) of pooled bonds that are construction issues automatically qualify for the two-year rule.  In other words, under I.R.C. § 148(c)(2), if pooled bonds are issued and part of the issue is used to make or finance loans for construction expenditures, that portion of the bonds is entitled to a two-year temporary period (two-year spending exception) rather than the six month spending exception.  The pooled bond issue may elect to apply the spending exceptions separately to each conduit loan.  If the election is made, then (1) the spending requirements for a loan begin on the earlier of the date the loan is made or the first day following the one-year period beginning on the issue date of the pooled financing issue, and (2) the rebate requirement (and none of the spending exceptions) applies to the gross proceeds on the issue before the date on which the spending requirements begin.  See Treas. Reg. 1.148-7(b)(6)(ii).  If the issuer makes this election, it may make all elections under the two-year rule separately for each loan, and may pay rebate with regard to some conduit loans and the 1.5% penalty for other conduit loans from the same pooled financing issue.  The 1.5% penalty is computed separately for each conduit loan.  If a borrower in the pool fails to meet the expenditure requirements, the issuer must pay rebate in accordance with the general rules of I.R.C. § 148(f)(2), unless it has elected to pay the 1.5% penalty in lieu of rebate.  This election must be made on or before the date the pooled bonds are issued and is irrevocable.  A pooled issue, however, may elect to terminate the 1.5% penalty for a loan rather than for the entire issue.

For purposes of the small issuer exception to rebate, in the context of a pooled financing in which the borrower otherwise meets the small issuer exception, the small issuer exception is available to the proceeds of the pooled issue in the hands of the small borrower.  The pooled financing may mix large and small issuers and treat each borrowing separately for purposes of available rebate exceptions.  A loan to a conduit borrower qualifies for the small issuer exception, however, only if (1) the bonds of the pooled financing are not PABs, (2) none of the loans to conduit borrowers are PABs and (3) the loan to the conduit borrower meets all requirements of the small issuer exception.  The issuer of the pooled financing issue is, however, subject to the rebate requirement for any unloaded gross proceeds.  Also, in determining the $5,000,000 size limitation of a pooled financing issuer, bonds of the pooled financing issue are not counted against the issuer for purposes of applying the small issuer exception to the issuer’s other issues, to the extent that the pooled financing issuer is not an ultimate borrower in the financing and the conduit borrowers are governmental units with general taxing powers and not subordinate to the issuer.  See I.R.C. 148(f)(4)(D)(ii)(II) and Treas. Reg. 1.148-8(d)(1).

Other Matters:

Private activity bond requirements:  I.R.C. § 147 – Maturity limitation

Other general bond requirements:  I.R.C. § 149

Current refundings versus advance refundings

PLR 200315012 regarding multipurpose issues and refundings

TEB enforcement of I.R.C. § 6700 penalties in pooled financing bond cases


Gannett and Jones, Pooled Financings, CPE Exempt Organizations Technical Instruction Program for FY 2000 Training.


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