PLR 201150026: IRS granted extra time to waive an arbitrage investment right

Plain-English summary

The IRS granted a city 45 days to make an election related to refunding bonds. The election waived the city's right to invest certain net sale proceeds and investment proceeds in higher-yielding investments during a 90-day temporary period. The city had not made the election because its tax certificate incorrectly stated that there were no transferred proceeds from the prior bonds. The IRS found that the city acted reasonably and in good faith and that granting the extension would not prejudice the government.

Ruling snapshot

• Question: Could the city receive extra time to waive its right to invest refunding bond proceeds in higher-yielding investments during the temporary period?
• Outcome: approved
• Key authorities: IRC §§ 103 and 148; Treas. Reg. §§ 1.148-9 and 301.9100-1 and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201150026
Third Party Communication: None
Release Date: 12/16/2011
Date of Communication: Not Applicable
Person To Contact:
Index Number: 148.00-00
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Telephone Number:
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Refer Reply To:
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PLR-130022-11
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Date:
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September 07, 2011
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LEGEND:

City = ----------------------------------------
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State = ------------------------

Date 1 = --------------------------

Date 2 = ------------------

Date 3 = -----------------------

a = ---------------

b = -----------------

Refunding Bonds = ------------------------------------------------------------------------
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Prior Bonds = ------------------------------------------------------------------------
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Dear ------------------------:

This is in response to a letter dated Date 2, submitted on behalf of City by your authorized representative, requesting relief under § 301.9100-1 of the Procedure and Administration Regulations. Specifically, the letter requests that City be granted an

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extension of time to make an election to waive the right to invest the net sale proceeds and investment proceeds of the Refunding Bonds in higher yielding investments during the ninety-day temporary period pursuant to § 1.148-9(d) of the Income Tax Regulations.

Facts and Representations

City is a political subdivision of State and owns electric and gas systems (the “Systems”). City issues bonds for the benefit of the Systems.

On Date 1, City issued the Refunding Bonds to currently refund the Prior Bonds, which had been issued for the purpose of refunding certain commercial paper notes and bonds (the “Refunded Obligations”). In connection with closing on Date 1, City did not make an election under § 1.148-9(g) to waive its right to invest the net sale proceeds and investment proceeds of the Refunding Bonds in higher yielding investments during the ninety-day temporary period that applies to a current refunding under § 1.148-9(d). Had the election been made, the blending of investments of the sale proceeds of the Refunding Bonds, the transferred proceeds and the resulting investment proceeds would have been permissible for purposes of computing the rebate and yield reduction payments under § 148 of the Internal Revenue Code (the “Code”).

Sale proceeds of the Refunding Bonds were deposited to an escrow fund (the “Refunding Bonds Escrow Fund”). Sale proceeds of the Prior Bonds had also been deposited to an escrow fund (the “Prior Bonds Escrow Fund”). Amounts in the Prior Bonds Escrow Fund were invested at a yield, calculated in accordance with § 1.148-5, equal to a fixed rate of a%, which is lower than the yield on the Prior Bonds. Amounts in the Refunding Bonds Escrow Fund were invested at a yield equal to a fixed rate of b%, which is lower than the yield on the Refunding Bonds.

On Date 3, when amounts in the Refunding Bonds Escrow Fund were applied to pay principal of the Prior Bonds, a portion amounts remaining in the Prior Bonds Escrow Fund became transferred proceeds of the Refunding Bonds pursuant to § 1.148-9(b). The transferred proceeds of the Refunding Bonds were later discovered by a rebate analyst for City in the course of City’s annual rebate compliance program. Thereafter, on Date 2, City submitted a ruling request for an extension of time to elect a waiver of its right to invest the net sale proceeds and investment proceeds of the Refunding Bonds in higher yielding investments during the ninety-day temporary period under § 1.148- 9(d)(2)(ii). As of Date 2, the Internal Revenue Service had not discovered City’s failure to timely elect such waiver.

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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. Section 103(b)(2) provides that
§ 103(a) does not apply to any arbitrage bond (within the meaning of § 148).

Section 148(a) provides that the term “arbitrage bond” means any bond issued as a part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bonds) to be used directly or indirectly (1) to acquire higher yielding investments; or (2) to replace funds which were used directly or indirectly to acquire higher yielding investments. For purposes of § 148(a), a bond shall be treated as an arbitrage bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in (1) or (2) of the previous sentence. Further, § 148(b) provides that the term “higher yielding investments” means any investment property which produces a yield over the term of the issue which is materially higher than the yield on the issue.

Section 1.148-9(b)(1) provides in part that when proceeds of the refunding issue discharge any of the outstanding principal amount of the prior issue, proceeds of the prior issue become transferred proceeds of the refunding issue and cease to be proceeds of the prior issue.

Section 1.148-9(d)(1) provides that in general proceeds of a refunding issue may be invested in higher yielding investments only during the temporary periods described in
§ 1.148-9(d)(2). Section 1.148-9(d)(2)(ii) provides in part that the temporary period for proceeds (other than transferred proceeds) of a current refunding issue is ninety days.

Section 1.148-9(g) provides in part that on or before the issue date, an issuer may waive the right to invest in higher yielding investments during any temporary period.

Section 301.9100-1 provides, in part, that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election (defined in § 301.9100-1(b) as an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin), or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Code except subtitles E, G, H and I.

Section 301.9100-3(a) provides that requests for extensions of time for regulatory elections that do not meet the requirements for automatic extensions in § 301.9100-2, must be made under the rules of § 301.9100-3. Requests for relief will be granted if the taxpayer provides evidence establishing to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that the grant of relief will not prejudice the interests of the Government.

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In part, § 301.9100-3(b) provides, with certain exceptions that are not applicable hereto, that the taxpayer is generally deemed to have acted reasonably and in good faith if the taxpayer requested relief under that section before the failure to make the regulatory election is discovered by the IRS.

Section 301.9100-3(c)(1)(i) provides, in part, that the interests of the Government are prejudiced if granting relief would result in a taxpayer having a lower tax liability than the taxpayer would have had if the election had been timely (taking into account the time value of money).

Conclusion

Under the facts and circumstances of this case, we conclude that City acted reasonably and in good faith and the granting an extension of time under § 301.9100-1 to make an election under § 1.148-2(h) to waive the right to invest the net sale proceeds and investment proceeds of the Refunding Bonds in higher yielding investments during the ninety-day temporary period described under § 1.148-9(d) will not prejudice the interests of the government. Therefore, City is granted an extension of time to 45 days from the date of this letter ruling to make such election. A copy of this letter should be attached to the election for City’s files. A copy is enclosed for that purpose.

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

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

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

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

Sincerely,

Associate Chief Counsel
(Financial Institutions and Products)

By:
Timothy L. Jones
Senior Counsel
Branch 5

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