Grants (Treas. Reg. 1.148-6(d))

January 29, 2014

General

Proceeds of a tax-exempt bond that are used to make a grant to an unrelated party are considered spent for yield restriction and arbitrage rebate purposes as soon as the grant is made.  Treas. Reg. 1.148-6(d)(4).  Bond counsel have interpreted the grant provision (and the September 2013 proposed regulations) to apply only for purposes of determining when the proceeds are spent.  The ability to treat the proceeds as spent does not relieve the issuer of tracking the use of grant moneys by the grantee for other purposes relating to tax-exemption of the bonds.  For example, the issuer must determine that the grant proceeds are used for proper capital expenditures or permitted working capital purposes.

The bond community has been concerned that the grant provisions of the regulations still require the issuer to determine whether the bonds constitute reimbursement bonds.  Some bond counsel have determined that, given the lack of guidance by the Internal Revenue Service, the use of grant moneys must satisfy the official intent rules and other reimbursement requirements under Treas. Reg. 1.150-2.  In other words, if the grantee uses the grant proceeds to reimburse itself for prior capital expenditures, some type of official intent for reimbursement must be adopted – likely by the issuer itself.

NABL has requested guidance from the Treasury Department concerning the reimbursement matter, as well as with respect to other relevant matters.  See December 2013 comments here.

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