Qualified Zone Academy Bonds; Obligations of States and Political Subdivisions

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8826]

RIN 1545-AX23

Qualified Zone Academy Bonds; Obligations of States and Political

Subdivisions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains temporary regulations that provide

guidance to state and local government issuers of qualified zone

academy bonds. These temporary regulations change the method of

ascertaining the qualified zone academy bond credit rate and provide

reimbursement rules. State and local governments that issue

[[Page 35574]]

qualified zone academy bonds will be affected by these temporary

regulations. The text of these temporary regulations also serves as the

text of the proposed regulations set forth in the notice of proposed

rulemaking on this subject in the Proposed Rules section of this issue

of the Federal Register.

DATES: Effective Date: These regulations are effective July 1, 1999.

Applicability Date: For dates of applicability, see Sec. 1.1397E-

1T(j).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Timothy L.

Jones (202) 622-3980 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 226(a) of the Taxpayer Relief Act of 1997, Public Law 105-

34 (111 Stat. 788), amended the Internal Revenue Code by redesignating

section 1397E as 1397F and adding a new section 1397E. Section 1397E

authorizes a new type of debt instrument known as a qualified zone

academy bond. Temporary regulations interpreting section 1397E were

published on January 7, 1998 (63 FR 671).

Explanation of Provisions

In General

A qualified zone academy bond is a taxable bond issued by a state

or local government, the proceeds of which are used to improve certain

eligible public schools. In lieu of receiving periodic interest

payments from the issuer, an eligible holder of a qualified zone

academy bond is generally allowed annual federal income tax credits

while the bond is outstanding. These credits compensate the holder for

lending money to the issuer and function as payments of interest on the

bond.

Credit Rate

Under section 1397E(b)(2), the Secretary shall determine a credit

rate for qualified zone academy bonds that the Secretary estimates will

permit the bonds to be issued without discount and without interest

cost to the issuer. Section 1.1397E-1T(b) provides that the credit rate

for a qualified zone academy bond is equal to 110 percent of the long-

term applicable Federal rate(AFR), compounded annually, for the month

in which the bond is issued.

Comments have been received that the credit rate established by

Sec. 1.1397E-1T(b) is generally lower than the rate required to permit

the issuance of qualified zone academy bonds without discount and

without interest cost to the issuer. Comments have also been received

that a single credit rate applicable to obligations issued during a

monthly period is too rigid and non-responsive to market interest rate

movements.

The revised regulations state that the Secretary will determine

monthly (or more often as the Secretary deems necessary) a credit rate

that will generally permit the issuance of qualified zone academy bonds

without discount and without interest cost to the issuers. The revised

regulations also provide that the manner for ascertaining the credit

rate determined by the Secretary will be set forth in procedures,

notices, forms, and instructions as prescribed by the Commissioner. A

notice to be published in the Internal Revenue Bulletin will further

provide that, until otherwise provided, the qualified zone academy bond

credit rate will be determined daily and will be published on the

Internet site for State and Local Government Bonds. The credit rate to

be applied to a qualified zone academy bond will be the daily rate for

the first day on which there is a binding contract in writing for the

sale or exchange of the bond. Treasury and the Internal Revenue Service

will monitor the issuance of qualified zone academy bonds to determine

if future adjustments in the credit rate may be required.

Coordination with Reimbursement Rules

These temporary regulations provide that the proceeds of a

qualified zone academy bond may be used to reimburse a qualified

expenditure (including any qualified non-capital expenditure) made

prior to the date the bond was issued. The temporary regulations

provide that rules similar to the reimbursement rules set forth in

Sec. 1.150-2 will apply. Comments are solicited about whether these

rules provide adequate guidance regarding reimbursement matters for

issuers of qualified zone academy bonds.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply.

See also the Special Analysis Section of the notice of proposed

rulemaking on qualified zone academy bonds in the Proposed Rules

Section of this issue of the Federal Register. Pursuant to section

7805(f) of the Internal Revenue Code, these temporary regulations will

be submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Timothy L. Jones,

Office of Assistant Chief Counsel (Financial Institutions & Products).

However, other personnel from IRS and the Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.1397E-1T is amended as follows:

1. Revising paragraphs (b) and (j).

2. Redesignating paragraph (h) as paragraph (i).

3. Adding new paragraph (h).

The revisions and additions read as follows:

Sec. 1.1397E-1T Qualified zone academy bonds (temporary).

* * * * *

(b) Credit rate. The Secretary shall determine monthly (or more

often as deemed necessary by the Secretary) the credit rate the

Secretary estimates will generally permit the issuance of a qualified

zone academy bond without discount and without interest cost to the

issuer. The manner for ascertaining the credit rate for a qualified

zone academy bond as determined by the Secretary shall be set forth in

procedures, notices, forms, or instructions prescribed by the

Commissioner.

* * * * *

(h) Reimbursement. An expenditure for a qualified purpose may be

reimbursed with proceeds of a qualified zone academy bond. For this

purpose, rules similar to those in Sec. 1.150-2 shall apply.

* * * * *

(j) Effective dates. Except as provided in this paragraph (j), this

section applies to a qualified zone academy bond issued on or after

January 1, 1998. Paragraph (b) and paragraph (h) of this section shall

apply to a qualified zone academy bond sold on or after July 1, 1999.

Paragraph (b) of this section as in effect

[[Page 35575]]

on January 7, 1998 (See 26 CFR Part 1 as revised April 1, 1999), shall

apply to a qualified zone academy bond sold prior to July 1, 1999. This

section shall not apply to a qualified zone academy bond sold after

January 5, 2001.

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

Approved: June 22, 1999.

Donald C. Lubick,

Assistant Secretary of the Treasury (Tax Policy).

[FR Doc. 99-16621 Filed 6-30-99; 8:45 am]

BILLING CODE 4830-01-P