PLR 1038014: IRS approved the planned tax treatment of bonds refunding commercial paper

Plain-English summary

An issuer planned to issue bonds to refund outstanding commercial paper. It asked whether interest on the new bonds would be excluded from a corporate alternative minimum tax adjustment and whether the bonds would be treated as private activity bonds for an alternative minimum tax preference item. The IRS ruled that section 56(g)(4)(B)(i) would not apply to the bond interest and that the bonds would not be treated as private activity bonds under section 57(a)(5)(C)(i), if issued within the specified statutory period. The analysis treated the commercial paper as a single issue under the applicable Treasury regulation and applied the special rules for refunding bonds.

Ruling snapshot

• Question: Would interest on the refunding bonds be subject to the specified alternative minimum tax adjustments, and would the bonds be treated as private activity bonds?
• Outcome: Approved
• Key authorities: IRC §§ 56(g)(4)(B)(i), 56(g)(4)(B)(iv), 57(a)(5)(C)(i), 57(a)(5)(C)(vi), 103, 141, and 150; Treas. Reg. §§ 1.56(g)-1 and 1.150-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201038014 Third Party Communication: None
Release Date: 9/24/2010 Date of Communication: Not Applicable
Index Number: 56.00-00, 57.00-00
Person To Contact:
------------------------------------------------------------ ------------------, ID No. -----------------
------------------- Telephone Number:
------------------------------------------------------------ ---------------------
------- Refer Reply To:
-------------------------------------------------- CC:ITA:B05
----------------------- PLR-155823-09
Date:
June 25, 2010

LEGEND

Issuer = --------------------------------------------------------------------------------
Notes = --------------------------------------------------------------------------------------------------
-----------------------------------------------
Date 1 = ----------------
Date 2 = --------------------
Date 3 = ----------------------
x= --------------

This is in response to your authorized representatives’ letter dated December 21, 2009,
requesting a ruling that (1) § 56(g)(4)(B)(i) of the Internal Revenue Code will not apply
to the interest on bonds issued after December 31, 2008, and before January 1, 2011,
to refund commercial paper, the issue date of which is after December 31, 2003, and
before January 1, 2009; and (2) such bonds will not be treated as private activity bonds
under § 57(a)(5)(C)(i).

FACTS AND REPRESENTATIONS

On Date 1 (which occurred after December 31, 2003, and before January 1, 2009),
Issuer executed a single master legal document (“Master Document”) that governs
Notes, which are exempt facility private activity bonds having a maturity of 270 days or
less and are issued pursuant to the same commercial paper program to finance or
refinance the same governmental purpose. On the same date the Master Document
was executed, Issuer issued x dollars of Notes (which amount exceeds $50,000).

After Date 1, Issuer issued both new money Notes and refunding Notes pursuant to the
commercial paper program. The last date on which Issuer issued new money Notes
was Date 2 (which is less than eighteen months after Date 1).

PLR-155823-09 2

Since Date 2, only refunding Notes have been issued, and none of the refunding Notes
issued since Date 2 have increased the principal amount of the outstanding Notes. The
term of the commercial paper program for Notes will not extend beyond Date 3 (which is
less than 30 years from Date 1).

In its tax certificates, Issuer elected to treat Notes as a single issue, the issue date of
which is Date 1, pursuant to § 1.150-1(c)(4)(ii)(A) of the Income Tax Regulations.

Issuer intends to issue bonds (“Bonds”) to refund all outstanding Notes. The Issuer
intends to issue the Bonds after December 31, 2008, and before January 1, 2011.

REQUESTED RULINGS

(1) Section 56(g)(4)(B)(i) will not apply to the interest on the Bonds.

(2) The Bonds will not be treated as private activity bonds under § 57(a)(5)(C)(i).

LAW AND ANALYSIS

Section 103(a) provides that, except as provided in § 103(b), gross income does not
include interest on any State or local bond.

In addition to the other taxes imposed by subtitle A of the Internal Revenue Code, § 55
imposes the alternative minimum tax. To calculate the alternative minimum tax
imposed by § 55, a taxpayer must calculate its alternative minimum taxable income.

Section 55(b)(2) of the Code provides that the term “alternative minimum taxable
income” means the taxable income of the taxpayer for the taxable year determined with
the adjustments provided in §§ 56 and 58 and increased by the amount of the items of
tax preference described in § 57.

Section 57(a)(5)(A) provides that one item of tax preference is tax-exempt interest on
specified private activity bonds reduced by any deduction (not allowable in computing
the regular tax) which would have been allowable if such interest were includible in
gross income.

Section 57(a)(5)(C)(i) provides that, generally, a specified private activity bond is any
private activity bond (as defined in § 141) which is issued after August 7, 1986, and the
interest on which is not includible in gross income under § 103.

One of the adjustments taken into account in determining the alternative minimum
taxable income of a corporation is the adjusted current earnings adjustment. Section
56(g)(1) provides that the alternative minimum taxable income of any corporation for
any taxable year shall be increased by 75 percent of the excess (if any) of the adjusted
current earnings of the corporation, over the alternative minimum taxable income,

PLR-155823-09 3

determined without regard to § 56(g) and the alternative tax net operating loss
deduction (the ACE adjustment).

Section 56(g)(3) provides that, for purposes of § 56(g), the term “adjusted current
earnings” means the alternative minimum taxable income for the taxable year
determined with the adjustments provided in § 56(g)(4), and determined without regard
to the alternative tax net operating loss deduction or the ACE adjustment.

Section 56(g)(4)(B)(i)(I) includes in adjusted current earnings amounts that are
otherwise excludable from gross income for purposes of computing alternative minimum
taxable income if such amounts are includable in determining the amount of earnings
and profits. For this purpose, Treas. Reg. § 1.56(g)-1(c)(1) makes clear that amounts
are treated as excludable from gross income for purposes of computing alternative
minimum taxable income only if such amounts are permanently excludable from
inclusion in gross income for alternative minimum tax purposes. Section
56(g)(4)(B)(i)(II) reduces the amount of income included in adjusted current earnings
under 56(g)(4)(B)(i)(I) by any deduction which would have been allowable in computing
alternative minimum taxable income if such amount had been includible in gross
income.

Treas. Reg. § 1.56(g)-1(c)(6) provides a partial list of income items excluded from gross
income for purposes of computing alternative minimum taxable income prior to taking
into account the ACE adjustment but that are included in earnings and profits, which list
includes interest excluded under § 103.

Consequently, unless an exception applies, interest on a bond that is excludable from
gross income in computing regular taxable income may be includible in alternative
minimum taxable income either as interest on a specified private activity bond pursuant
to § 57(a)(5)(A) or as a result of an increase in adjusted current earnings pursuant to §
56(g)(4)(B).

Section 57(a)(5)(C)(vi) provides: (I) for purposes of § 57(a)(5)(C)(i), the term “private
activity bond” shall not include any bond issued after December 31, 2008, and before
January 1, 2011; (II) for purposes of § 57(a)(5)(C)(vi)(I), a refunding bond (whether a
current or advance refunding) shall be treated as issued on the date of the issuance of
the refunded bond (or in the case of a series of refundings, the original bond); and (III)
§ 57(a)(5)(C)(vi)(II) shall not apply to any refunding bond which is issued to refund any
bond which was issued after December 31, 2003, and before January 1, 2009.

Section 56(g)(4)(B)(iv) provides: (I) § 56(g)(4)(B)(i) shall not apply in the case of any
interest on a bond issued after December 31, 2008, and before January 1, 2011; (II) for
purposes of § 56(g)(4)(B)(iv)(I), a refunding bond (whether a current or advance
refunding) shall be treated as issued on the date of the issuance of the refunded bond
(or in the case of a series of refundings, the original bond); and (III) § 56(g)(4)(B)(iv)(II)

PLR-155823-09 4

shall not apply to any refunding bond which is issued to refund any bond which was
issued after December 31, 2003, and before January 1, 2009.

Section 103(b)(1) provides that interest on a State or local bond is not excluded from
gross income if the bond is a private activity bond that is not a qualified bond within the
meaning of § 141.

Under § 141(e), a qualified bond includes an exempt facility bond, so long as other
applicable requirements are satisfied.

Section 150(a)(1) provides that, for purposes of §§ 141 through 150, the term “bond”
includes any obligation.

Section 1.150-1(b) provides that, generally, issue date, in reference to an issue, is the
first date on which the issuer receives the purchase price in exchange for delivery of the
evidence of indebtedness representing any bond included in the issue; issue date, in
reference to a bond, is the date on which the issuer receives the purchase price in
exchange for that bond; and in no event is the issue date earlier than the first day on
which interest begins to accrue on the bond or bonds for Federal income tax purposes.

Section 1.150-1(c)(1) provides that, generally, the term issue means two or more bonds
that: (1) are sold at substantially the same time, (2) are sold pursuant to the same plan
of financing, and (3) are reasonably expected to be paid from substantially the same
source of funds.

Section 1.150-1(c)(4) provides that short-term bonds having a maturity of 270 days or
less (commercial paper) issued pursuant to the same commercial paper program may
be treated as part of a single issue, the issue date of which is the first date the
aggregate amount of commercial paper issued under the program exceeds the lesser of
$50,000 or 5 percent of the aggregate issue price of the commercial paper in the
program. A commercial paper program is a program to issue commercial paper to
finance or refinance the same governmental purpose pursuant to a single master legal
document. Commercial paper is not part of the same commercial paper program unless
issued during an 18-month period, beginning on the deemed issue date. In addition,
commercial paper issued after the end of this 18-month period may be treated as part of
the program to the extent issued to refund commercial paper that is part of the program,
but only to the extent that: (1) there is no increase in the principal amount outstanding;
and (2) the program does not have a term in excess of (i) 30 years; or (ii) the period
reasonably necessary for the governmental purposes of the program.

Issuer executed the Master Document on Date 1. Also on Date 1, Issuer issued Notes
in excess of $50,000. Issuer has subsequently issued other Notes pursuant to the
same commercial paper program, but all new money Notes were issued within the 18-
month period beginning on Date 1. Only refunding Notes were issued outside this 18-
month period, and none of these Notes increased the principal amount of Notes

PLR-155823-09 5

outstanding. The term of Issuer’s commercial paper program does not exceed 30
years. In its tax certificates, Issuer elected to treat Notes as a single issue, the issue
date of which is Date 1, pursuant to § 1.150-1(c)(4)(ii)(A). Thus, pursuant to § 1.150-
1(c)(4)(ii)(A), the issue date of the Notes is Date 1.

Section 1.56(g)-1(c)(6) specifically lists interest that is excluded under § 103 as an item
to be included in a corporation’s adjusted current earnings for purposes of calculating
alternative minimum taxable income. Section 103 specifically references § 141 in
determining which private activity bonds are qualified bonds. Because the provisions of
§ 150 and the regulations thereunder (including § 1.150-1) otherwise apply to private
activity bonds under § 141, and because § 141 (through application of § 103) is used as
the basis for determining adjusted current earnings for purposes of calculating
alternative minimum taxable income, we conclude that the special rule for commercial
paper financings applies for the purpose of determining the issue date of an issue under
§ 56(g)(4)(B)(iv).

Because the issue date of the Notes pursuant to § 1.150-1(c)(4)(ii)(A) is Date 1, the
issue date of the Notes for purposes of § 56(g)(4)(B)(iv) is Date 1. Under
§ 56(g)(4)(B)(iv)(III), § 56(g)(4)(B)(iv)(II) will not apply to Bonds because Bonds will be
issued to refund Notes, which were issued on Date 1, and Date 1 is after December 31,
2003, and before January 1, 2009. Because § 56(g)(4)(B)(iv)(II) will not apply to Bonds,
for purposes of § 56(g)(4)(B)(iv), the issue date of the Bonds is determined pursuant to
the general rules contained in §§ 1.150-1(b) and (c)(1). Based on Issuer’s
representations that the Bonds will be issued after December 31, 2008, and before
January 1, 2011, for purposes of § 56(g)(4)(B)(iv), the issue date of the Bonds will be
after December 31, 2008, and before January 1, 2011. Section 56(g)(4)(B)(iv)(I) states
that § 56(g)(4)(B)(i) shall not apply in the case of any interest on a bond issued after
December 31, 2008, and before January 1, 2011. Therefore, if Bonds are issued after
December 31, 2008, and before January 1, 2011, § 56(g)(4)(B)(i) will not apply to the
interest on the Bonds.

Section 57(a)(5) includes as items of tax preference private activity bonds, as defined in
§ 141, the interest on which is excluded under § 103. Because the provisions of § 150
and the regulations thereunder (including § 1.150-1) otherwise apply to private activity
bonds under § 141, and because § 141 (through the application of § 103 and otherwise)
is also used as the basis for inclusion of certain interest as an item of tax preference for
purposes of calculating alternative minimum taxable income, we also conclude that the
special rule for commercial paper financings applies for the purpose of determining the
issue date of an issue under § 57(a)(5)(C)(vi).

Because the issue date of the Notes pursuant to § 1.150-1(c)(4)(ii)(A) is Date 1, the
issue date of the Notes for purposes of § 57(a)(5)(C)(vi) is Date 1. Under
§ 57(a)(5)(C)(vi)(III), § 57(a)(5)(C)(vi)(II) will not apply to Bonds because Bonds will be
issued to refund Notes, which were issued on Date 1, and Date 1 is after December 31,
2003, and before January 1, 2009. Because § 57(a)(5)(C)(vi)(II) will not apply to Bonds,

PLR-155823-09 6

for purposes of § 57(a)(5)(C)(vi), the issue date of the Bonds is determined pursuant to
the general rules contained in §§ 1.150-1(b) and (c)(1). Based on Issuer’s
representations that the Bonds will be issued after December 31, 2008, and before
January 1, 2011, for purposes of § 57(a)(5)(C)(vi), the issue date of the Bonds will be
after December 31, 2008, and before January 1, 2011. Section 57(a)(5)(C)(vi)(I) states
that, for purposes of § 57(a)(5)(C)(i), the term “private activity bond” shall not include
any bond issued after December 31, 2008, and before January 1, 2011. Therefore, if
Bonds are issued after December 31, 2008, and before January 1, 2011, the Bonds will
not be treated as private activity bonds under § 57(a)(5)(C)(i).

CONCLUSIONS

Based on the facts presented and representations made, if Bonds are issued after
December 31, 2008, and before January 1, 2011:

(1) Section 56(g)(4)(B)(i) will not apply to the interest on the Bonds.

(2) The Bonds will not be treated as private activity bonds under § 57(a)(5)(C)(i).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to Issuer. Section 6110(k)(3) of the Code provides that it
may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

The rulings contained in this letter are based upon information and representations
submitted by Issuer and accompanied by a penalty of perjury statement executed by an
appropriate party. While this office has not verified any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

                                   Sincerely,

                                   Jeffrey Rodrick
                                   Senior Technician Reviewer, Branch 5
                                   (Income Tax & Accounting)

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