Volume Cap Matters

Annual volume cap information

Volume cap of a sphere

Section 3.20 of Rev. Proc. 2023-34 provides that the amount for calculating volume cap under Section 146(d)(1) for calendar year 2024 is the greater of $125 multiplied by the state population, or $378,230,000.  The population figures to use for this calculation are the resident population estimates released by the U.S. Census Bureau on December 19, 2023, and described under Press Release CB23-217.  Notice 2024-25 (Mar. 18, 2024)

How much volume cap should be requested?

Under Section 146, which applies to non-501(c)(3) private activity bonds, the amount of volume cap allocated must equal the “aggregate face amount” of the bonds.  The Treasury Department and the IRS have taken the position that “aggregate face amount” in this context means “issue price.”  This means aggregate face amount is to include any net premium.  Therefore, bond counsel firms typically recommend that volume cap be requested in excess of the pure face amount of the bonds, just in case any premium is generated.

See PLR 9431007 in which the Internal Revenue Service explains that “aggregate face amount” in Section 146(a) and 146(f), given the history of the section, means “issue price,” at least with respect to bonds issued with an original issue discount.

Is a volume cap allocation needed for refunding bonds?

Assume that multifamily housing bonds (the “Refunded Bonds”) were issued with appropriate volume cap allocation from a local jurisdiction or from the statewide balance.   These Refunded Bonds are now proposed to be refunded with a series of refunding bonds (the “Refunding Bonds”).  In what circumstances will additional volume cap need to be requested under the Code and Regulations?

Subsection (i) of Section 146 of the Code describes the treatment of refunding issues for purposes of volume cap allocation.  Subsection (i) states that a bond issued to refund another bond is not considered a “private activity bond,” for purposes of the volume cap requirement, to the extent that the amount of such bond does not exceed the outstanding amount of the refunded bond.  There are special rules for student loan bonds and qualified mortgage bonds, and Subsection (i) does not apply to any bond issued to advance refund another bond.

See PLR 201447023 (August 1, 2014):  Bonds issued to refinance 144(b)(1)(B) student loans satisfy the nexus requirement and can be used to refinance capitalized and accrued interest on the original loans.

Note special volume cap refunding rules in Section 146(i)(2) and (3) relating to student loan bonds and qualified mortgage bonds.

Carryforward of Volume Cap

Volume cap for a calendar year may be carried forward under the provisions of Section 146(f).  Such subsection provides that an issuing authority may elect to treat all or any portion of excess volume cap as a carryforward for one or more carryforward purposes.  In the election, the authority must (1) identify the purpose for which the carryforward is elected, and (2) specify the portion of the excess which is to be a carryforward for each such purpose.

Private activity bonds issued in future years with respect to a carryforward purpose are not taken into account under Section 146(a) to the extent the amount of such bonds does not exceed the amount of the carryforward elected for such purpose.  Carryforwards elected with respect to any purpose must be used in the order of the calendar years in which they arose.

An election to carryforward (and any identification or specification contained therein), once made, is irrevocable.

Carryforwards are permitted only for the following purposes:

• For the purpose of issuing exempt facility bonds described in one of the paragraphs of I.R.C. 142(a) (e.g., airports, docks and wharves, etc.)
• For the purpose of issuing qualified mortgage bonds or mortgage credit certificates
• For the purpose of issuing qualified student loan bonds
• For the purpose of issuing qualified redevelopment bonds

Carryforward of volume cap may not be done for small issue bonds.

Carryforwards are good for three calendar years after the original calendar year of allocation and are used in the order in which they are elected.  A carryover does not need to be renewed throughout the three-year period.  The original carryover applies for all three years.  In other words, the issuer does not need to carry over the original excess from one year to the next with another IRS Form 8328 filing.

On Form 8328, Carryforward Election of Unused Private Activity Bond Volume Cap, Part II (lines 1 through 6) relates to volume cap of the current year, and is not used to identify allocations of carryforward volume cap.  The Form 8328 must be filed by the earlier of February 15 of the year following the year in which the excess has arisen or the date on which bonds are issued pursuant to the carryforward allocation.

PLR 201615008 (Jan. 13, 2016): A public authority was granted a 45-day extension of time to file Form 8328, Carryforward Election of Unused Private Activity Bond Volume Cap, to make a carryforward election under Code Sec. 146(f) with respect to a specified amount of unused private activity bond volume cap. The entity acted reasonably and in good faith, and granting the relief did not prejudice the government’s interests.

Rev. Proc. 2005-30 provides an automatic six-month extension of the filing date if the issuing authority files Form 8328 within six months of the original due date and meets the following additional conditions: (1) the issuing authority must print or type on the top of the form “FILED PURSUANT TO REV. PROC. 2005-30,” (2) the Internal Revenue Service has not provided the issuing authority with written notice that it failed to make the carryforward election timely, (3) the late filing does not represent a reversal of an earlier decision not to file a carryforward election by the due date, (4) the late filing is not in reaction to changed circumstances after the filing date, and (5) all other requirements for the filing are met. Rev. Proc. 2005-30 is available for download from the Internet at: http://www.irs.gov/irb/2005-22_IRB/ar09.html.

PLR 201528005: Extension to file carryforward election.

PLR 200208014 (Nov. 20, 2001):  In this PLR, the Internal Revenue Service determines that the Authority (which is a successor issuer to the Administration) will succeed to any carryforward election properly made by the Administration and will be able to use that carryforward to the same extent that the Administration could have used that carryforward had it remained in existence.

Other Matters

The Bond Buyer, “Draw-Down Bond Issuers are Satisfied With New IRS Guidance on PAB Cap,” August 4, 2011:  Guidance by the IRS in November 2010 indicated that draws of draw-down bond proceeds in different years would require additional volume cap allocations.  New guidance provided on August 3, 2011, however, reverses course. In that guidance, the IRS states that an issuer can consider the bonds “issued at the first draw of bond proceeds for purposes of obtaining an allocation of PAB Cap.  The issuer can carry the cap forward for three years for the bonds, even though some of the bond proceeds may not be drawn down until the second or third year after issuance.”

See Notice 2010-81 and Notice 2011-63 (especially the 2011 notice) concerning rules on how to allocate volume cap to draw-down bonds with draws in differing years.

See FSA 001678 (Jan. 31, 2004) regarding delegation of volume cap determination from the legislature to the governor.