Agenda - Council - 08/13/1991 - Laserfiche WebLink

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AUC~ l~ '91 15:45 HOLMES S, ,~RAVEI'~ P'9 ' 6/I'i/9! 8UblMARY OF REIMBURSEMENT REOULATtON8 PROPOSED TRE1L REG. SS 1.I05-1'/arid l.' The Perceived Problem. The reimbursement regulations were Issued in response to a perceived abuse. The [RS was concerned that a city might decide to issue bonds to reimburse itself for old expenditures, such as a two-year-old lJbrazT financed with general funds, and then invest bond proceeds without regard to rebate or yield restriction requirements until spent on a new pro}eat. These bonds began to be referred to as "pyramid bonds," on the theory that an issuer could rely on this method to reimburse itself for expenditures as far back as construction of the pyramids. The IRS has taken the position that under certain clreumstanees, the reimbursement is not effective ~nd the bond proceeds are in reality being issued to ftnanee the new expenditures and should be subject to applicable yield restriction and rebate requirements, The new regulations ate intended to identify under what circumstances bond proceeds used for reimbursement will be considered "spent" for yield ~'estriction and cebate purposes. II. The Consequences for,Failure to CompI~. If an issue does not comply with the reimbursement rules, the immediate result is that bond proceeds at.e not considered "spent". The bond proceeds, wherever they are~ will be deemed to be subject to wl~atever yield restriction and rebate requirements are applicable. Assume, for example, that the issue allocates $1,00§,000 of bond proceeds to an expenditure made the prior year and no declaration of official intent was made. A. Rebate If the t~uer fell within the $5,000,000 small issuer rebate exemption, rebate is not a problem. If the issuer was attempting to meet the 6-month or 2-year spenddown test, however, the issuer will be treated as if it hasn't spent the $1,000,000 of proeeecl~ This may cause it to fail the spenddown requLuement. If the issue is subject to rebate, it will owe rebate on the investment of the $1,000,000 even if for its accounting purposes the issuer considers the money spent. B. Yield Restrletion. Assume the same $1,000,000 reimbursement allocation ~ade 'without a valid official intent.. NormaLly, the issuer has a three-year temporary period for the expenditure of proceeds to be used for construction or acqusltion of a project based on an expectation that ail amounts wil] be spent within that 'three year period~ and any amounts remaining after three years may be subject to yield restrictior~ If amounts are not deemed "spent", and they remain unexpended past the three year temporary period, they may be subject to yield restrictions. If amounts subject to yield restriction are invested at a yield in exce~s of the yield on the bonds, the bonds become "arbitrage bonds" and lose their tax-exempt status.