--- kind: "range" citation: "26 C.F.R. §§ 1.141-0–1.141-6" title: "26" from: "1.141-0" to: "1.141-6" count: 7 url: "https://uscodex.org/cfr/26/1.141-0..1.141-6" --- # §1.141-0. Table of contents. This section lists the captioned paragraphs contained in [§§ 1.141-1 through 1.141-16](/cfr/26/1.141-1..1.141-16.md). # §1.141-1. Definitions and rules of general application. - (a) **In general.** For purposes of [§§ 1.141-0 through 1.141-16](/cfr/26/1.141-0..1.141-16.md), the following definitions and rules apply: The definitions in this section, the definitions in [§ 1.150-1](/cfr/26/1.150-1.md), the definition of placed in service in [§ 1.150-2(c)](/cfr/26/1.150-2.md?p=c), the definition of reasonably required reserve or replacement fund in [§ 1.148-2(f)](/cfr/26/1.148-2.md?p=f), and the definitions in [§ 1.148-1](/cfr/26/1.148-1.md) of bond year, commingled fund, fixed yield issue, higher yielding investments, investment, investment proceeds, issue price, issuer, nonpurpose investment, purpose investment, qualified guarantee, qualified hedge, reasonable expectations or reasonableness, rebate amount, replacement proceeds, sale proceeds, variable yield issue and yield. - (b) **Certain general definitions.** Common areas means portions of a facility that are equally available to all users of a facility on the same basis for uses that are incidental to the primary use of the facility. For example, hallways and elevators generally are treated as common areas if they are used by the different lessees of a facility in connection with the primary use of that facility. Consistently applied means applied uniformly to account for proceeds and other amounts. Deliberate action is defined in [§ 1.141-2(d)(3)](/cfr/26/1.141-2.md?p=d-3). Discrete portion means a portion of a facility that consists of any separate and discrete portion of a facility to which use is limited, other than common areas. A floor of a building and a portion of a building separated by walls, partitions, or other physical barriers are examples of a discrete portion. Disposition is defined in [§ 1.141-12(c)(1)](/cfr/26/1.141-12.md?p=c-1). Disposition proceeds is defined in [§ 1.141-12(c)(1)](/cfr/26/1.141-12.md?p=c-1). Essential governmental function is defined in [§ 1.141-5(d)(4)(ii)](/cfr/26/1.141-5.md?p=d-4-ii). Financed means constructed, reconstructed, or acquired with proceeds of an issue. Governmental bond has the same meaning as in [§ 1.150-1(b)](/cfr/26/1.150-1.md?p=b), except that, for purposes of [§ 1.141-13](/cfr/26/1.141-13.md), governmental bond is defined in [§ 1.141-13(b)(2)(iv)](/cfr/26/1.141-13.md?p=b-2-iv). Governmental person means a state or local governmental unit as defined in [§ 1.103-1](/cfr/26/1.103-1.md) or any instrumentality thereof. It does not include the United States or any agency or instrumentality thereof. Hazardous waste remediation bonds is defined in [§ 1.141-4(f)(1)](/cfr/26/1.141-4.md?p=f-1). Measurement period is defined in [§ 1.141-3(g)(2)](/cfr/26/1.141-3.md?p=g-2). Nongovernmental person means a person other than a governmental person. Output facility means electric and gas generation, transmission, distribution, and related facilities, and water collection, storage, and distribution facilities. Private business tests means the private business use test and the private security or payment test of [section 141(b)](/cfr/26/141.md?p=b). Proceeds means the sale proceeds of an issue (other than those sale proceeds used to retire bonds of the issue that are not deposited in a reasonably required reserve or replacement fund). Proceeds also include any investment proceeds from investments that accrue during the project period (net of rebate amounts attributable to the project period). Disposition proceeds of an issue are treated as proceeds to the extent provided in [§ 1.141-12](/cfr/26/1.141-12.md). The Commissioner may treat any replaced amounts as proceeds. Project period means the period beginning on the issue date and ending on the date that the project is placed in service. In the case of a multipurpose issue, the issuer may elect to treat the project period for the entire issue as ending on either the expiration of the temporary period described in [§ 1.148-2(e)(2)](/cfr/26/1.148-2.md?p=e-2) or the end of the fifth bond year after the issue date. Public utility property means public utility property as defined in [section 168(i)(10)](/cfr/26/168.md?p=i-10). Qualified bond means a qualified bond as defined in [section 141(e)](/cfr/26/141.md?p=e). Renewal option means a provision under which either party has a legally enforceable right to renew the contract. Thus, for example, a provision under which a contract is automatically renewed for 1-year periods absent cancellation by either party is not a renewal option (even if it is expected to be renewed). Replaced amounts means replacement proceeds other than amounts that are treated as replacement proceeds solely because they are sinking funds or pledged funds. Weighted average maturity is determined under [section 147(b)](/cfr/26/147.md?p=b). Weighted average reasonably expected economic life is determined under [section 147(b)](/cfr/26/147.md?p=b). The reasonably expected economic life of property may be determined by reference to the class life of the property under [section 168](/cfr/26/168.md). - (c) **Elections.** Elections must be made in writing on or before the issue date and retained as part of the bond documents, and, once made, may not be revoked without the permission of the Commissioner. - (d) **Related parties.** Except as otherwise provided, all related parties are treated as one person and any reference to “person” includes any related party. - (e) **Partnerships.** A partnership (as defined in [section 7701(a)(2)](/cfr/26/7701.md?p=a-2)) is treated as an aggregate of its partners, rather than as an entity. # §1.141-2. Private activity bond tests. - (a) **Overview.** Interest on a private activity bond is not excludable from gross income under [section 103(a)](/cfr/26/103.md?p=a) unless the bond is a qualified bond. The purpose of the private activity bond tests of [section 141](/cfr/26/141.md) is to limit the volume of tax-exempt bonds that finance the activities of nongovernmental persons, without regard to whether a financing actually transfers benefits of tax-exempt financing to a nongovernmental person. The private activity bond tests serve to identify arrangements that have the potential to transfer the benefits of tax-exempt financing, as well as arrangements that actually transfer these benefits. The regulations under [section 141](/cfr/26/141.md) may not be applied in a manner that is inconsistent with these purposes. - (b) **Scope.** [Sections 1.141-0 through 1.141-16](/cfr/26/1.141-0..1.141-16.md) apply generally for purposes of the private activity bond limitations under [section 141](/cfr/26/141.md). - (c) **General definition of private activity bond.** Under [section 141](/cfr/26/141.md), bonds are private activity bonds if they meet either the private business use test and private security or payment test of [section 141(b)](/cfr/26/141.md?p=b) or the private loan financing test of [section 141(c)](/cfr/26/141.md?p=c). The private business use and private security or payment tests are described in §§ [1.141-3](/cfr/26/1.141-3.md) and [1.141-4](/cfr/26/1.141-4.md). The private loan financing test is described in [§ 1.141-5](/cfr/26/1.141-5.md). - (d) **Reasonable expectations and deliberate actions—** - (1) **In general.** An issue is an issue of private activity bonds if the issuer reasonably expects, as of the issue date, that the issue will meet either the private business tests or the private loan financing test. An issue is also an issue of private activity bonds if the issuer takes a deliberate action, subsequent to the issue date, that causes the conditions of either the private business tests or the private loan financing test to be met. - (2) **Reasonable expectations test—** - (i) **In general.** In general, the reasonable expectations test must take into account reasonable expectations about events and actions over the entire stated term of an issue. - (ii) **Special rule for issues with mandatory redemption provisions.** An action that is reasonably expected, as of the issue date, to occur after the issue date and to cause either the private business tests or the private loan financing test to be met may be disregarded for purposes of those tests if— - (A) The issuer reasonably expects, as of the issue date, that the financed property will be used for a governmental purpose for a substantial period before the action; - (B) The issuer is required to redeem all nonqualifying bonds (regardless of the amount of disposition proceeds actually received) within 6 months of the date of the action; - (C) The issuer does not enter into any arrangement with a nongovernmental person, as of the issue date, with respect to that specific action; and - (D) The mandatory redemption of bonds meets all of the conditions for remedial action under [§ 1.141-12(a)](/cfr/26/1.141-12.md?p=a). - (3) **Deliberate action defined—** - (i) **In general.** Except as otherwise provided in this [paragraph (d)(3)](#d-3), a deliberate action is any action taken by the issuer that is within its control. An intent to violate the requirements of [section 141](/cfr/26/141.md) is not necessary for an action to be deliberate. - (ii) **Safe harbor exceptions.** An action is not treated as a deliberate action if— - (A) It would be treated as an involuntary or compulsory conversion under [section 1033](/cfr/26/1033.md); or - (B) **It is taken in response to a regulatory directive made by the federal government.** See [§ 1.141-7(g)(4)](/cfr/26/1.141-7.md?p=g-4). - (4) **Special rule for dispositions of personal property in the ordinary course of an established governmental program—** - (i) **In general.** Dispositions of personal property in the ordinary course of an established governmental program are not treated as deliberate actions if— - (A) The weighted average maturity of the bonds financing that personal property is not greater than 120 percent of the reasonably expected actual use of that property for governmental purposes; - (B) The issuer reasonably expects on the issue date that the fair market value of that property on the date of disposition will be not greater than 25 percent of its cost; and - (C) **The property is no longer suitable for its governmental purposes on the date of disposition.** - (ii) **Reasonable expectations test.** The reasonable expectation that a disposition described in [paragraph (d)(4)(i)](#d-4-i) of this section may occur in the ordinary course while the bonds are outstanding will not cause the issue to meet the private activity bond tests if the issuer is required to deposit amounts received from the disposition in a commingled fund with substantial tax or other governmental revenues and the issuer reasonably expects to spend the amounts on governmental programs within 6 months from the date of commingling. - (iii) **Separate issue treatment.** An issuer may treat the bonds properly allocable to the personal property eligible for this exception as a separate issue under [§ 1.150-1(c)(3)](/cfr/26/1.150-1.md?p=c-3). - (5) **Special rule for general obligation bond programs that finance a large number of separate purposes.** The determination of whether bonds of an issue are private activity bonds may be based solely on the issuer's reasonable expectations as of the issue date if all of the requirements of [paragraphs (d)(5)(i) through (vii)](#d-5-i..d-5-vii) of this section are met. - (i) The issue is an issue of general obligation bonds of a general purpose governmental unit that finances at least 25 separate purposes (as defined in [§ 1.150-1(c)(3)](/cfr/26/1.150-1.md?p=c-3)) and does not predominantly finance fewer than 4 separate purposes. - (ii) The issuer has adopted a fund method of accounting for its general governmental purposes that makes tracing the bond proceeds to specific expenditures unreasonably burdensome. - (iii) The issuer reasonably expects on the issue date to allocate all of the net proceeds of the issue to capital expenditures within 6 months of the issue date and adopts reasonable procedures to verify that net proceeds are in fact so expended. A program to randomly spot check that 10 percent of the net proceeds were so expended generally is a reasonable verification procedure for this purpose. - (iv) The issuer reasonably expects on the issue date to expend all of the net proceeds of the issue before expending proceeds of a subsequent issue of similar general obligation bonds. - (v) The issuer reasonably expects on the issue date that it will not make any loans to nongovernmental persons with the proceeds of the issue. - (vi) The issuer reasonably expects on the issue date that the capital expenditures that it could make during the 6-month period beginning on the issue date with the net proceeds of the issue that would not meet the private business tests are not less than 125 percent of the capital expenditures to be financed with the net proceeds of the issue. - (vii) The issuer reasonably expects on the issue date that the weighted average maturity of the issue is not greater than 120 percent of the weighted average reasonably expected economic life of the capital expenditures financed with the issue. To determine reasonably expected economic life for this purpose an issuer may use reasonable estimates based on the type of expenditures made from a fund. - (e) **When a deliberate action occurs.** A deliberate action occurs on the date the issuer enters into a binding contract with a nongovernmental person for use of the financed property that is not subject to any material contingencies. - (f) **Certain remedial actions.** See [§ 1.141-12](/cfr/26/1.141-12.md) for certain remedial actions that prevent a deliberate action with respect to property financed by an issue from causing that issue to meet the private business use test or the private loan financing test. - (g) **Examples.** The following examples illustrate the application of this section: # §1.141-3. Definition of private business use. - (a) **General rule—** - (1) **In general.** The private business use test relates to the use of the proceeds of an issue. The 10 percent private business use test of [section 141(b)(1)](/cfr/26/141.md?p=b-1) is met if more than 10 percent of the proceeds of an issue is used in a trade or business of a nongovernmental person. For this purpose, the use of financed property is treated as the direct use of proceeds. Any activity carried on by a person other than a natural person is treated as a trade or business. Unless the context or a provision clearly requires otherwise, this section also applies to the private business use test under [sections 141(b)(3)](/cfr/26/141.md?p=b-3) (unrelated or disproportionate use), 141(b)(4) ($15 million limitation for certain output facilities), and 141(b)(5) (the coordination with the volume cap where the nonqualified amount exceeds $15 million). - (2) **Indirect use.** In determining whether an issue meets the private business use test, it is necessary to look to both the indirect and direct uses of proceeds. For example, a facility is treated as being used for a private business use if it is leased to a nongovernmental person and subleased to a governmental person or if it is leased to a governmental person and then subleased to a nongovernmental person, provided that in each case the nongovernmental person's use is in a trade or business. Similarly, the issuer's use of the proceeds to engage in a series of financing transactions for property to be used by nongovernmental persons in their trades or businesses may cause the private business use test to be met. In addition, proceeds are treated as used in the trade or business of a nongovernmental person if a nongovernmental person, as a result of a single transaction or a series of related transactions, uses property acquired with the proceeds of an issue. - (3) **Aggregation of private business use.** The use of proceeds by all nongovernmental persons is aggregated to determine whether the private business use test is met. - (b) **Types of private business use arrangements—** - (1) **In general.** Both actual and beneficial use by a nongovernmental person may be treated as private business use. In most cases, the private business use test is met only if a nongovernmental person has special legal entitlements to use the financed property under an arrangement with the issuer. In general, a nongovernmental person is treated as a private business user of proceeds and financed property as a result of ownership; actual or beneficial use of property pursuant to a lease, or a management or incentive payment contract; or certain other arrangements such as a take or pay or other output-type contract. - (2) **Ownership.** Except as provided in paragraph [(d)(1)](#d-1) or [(d)(2)](#d-2) of this section, ownership by a nongovernmental person of financed property is private business use of that property. For this purpose, ownership refers to ownership for federal income tax purposes. - (3) **Leases.** Except as provided in [paragraph (d)](#d) of this section, the lease of financed property to a nongovernmental person is private business use of that property. For this purpose, any arrangement that is properly characterized as a lease for federal income tax purposes is treated as a lease. In determining whether a management contract is properly characterized as a lease, it is necessary to consider all of the facts and circumstances, including the following factors— - (i) The degree of control over the property that is exercised by a nongovernmental person; and - (ii) **Whether a nongovernmental person bears risk of loss of the financed property.** - (4) **Management contracts—** - (i) **Facts and circumstances test.** Except as provided in [paragraph (d)](#d) of this section, a management contract (within the meaning of [paragraph (b)(4)(ii)](#b-4-ii) of this section) with respect to financed property may result in private business use of that property, based on all of the facts and circumstances. A management contract with respect to financed property generally results in private business use of that property if the contract provides for compensation for services rendered with compensation based, in whole or in part, on a share of net profits from the operation of the facility. - (ii) **Management contract defined.** For purposes of this section, a management contract is a management, service, or incentive payment contract between a governmental person and a service provider under which the service provider provides services involving all, a portion of, or any function of, a facility. For example, a contract for the provision of management services for an entire hospital, a contract for management services for a specific department of a hospital, and an incentive payment contract for physician services to patients of a hospital are each treated as a management contract. - (iii) **Arrangements generally not treated as management contracts.** The arrangements described in [paragraphs (b)(4)(iii)(A) through (D)](#b-4-iii-A..b-4-iii-D) of this section generally are not treated as management contracts that give rise to private business use. - (A) Contracts for services that are solely incidental to the primary governmental function or functions of a financed facility (for example, contracts for janitorial, office equipment repair, hospital billing, or similar services). - (B) The mere granting of admitting privileges by a hospital to a doctor, even if those privileges are conditioned on the provision of de minimis services, if those privileges are available to all qualified physicians in the area, consistent with the size and nature of its facilities. - (C) A contract to provide for the operation of a facility or system of facilities that consists predominantly of public utility property, if the only compensation is the reimbursement of actual and direct expenses of the service provider and reasonable administrative overhead expenses of the service provider. - (D) A contract to provide for services, if the only compensation is the reimbursement of the service provider for actual and direct expenses paid by the service provider to unrelated parties. - (iv) **Management contracts that are properly treated as other types of private business use.** A management contract with respect to financed property results in private business use of that property if the service provider is treated as the lessee or owner of financed property for federal income tax purposes, unless an exception under [paragraph (d)](#d) of this section applies to the arrangement. - (5) **Output contracts.** See [§ 1.141-7](/cfr/26/1.141-7.md) for special rules for contracts for the purchase of output of output facilities. - (6) **Research agreements—** - (i) **Facts and circumstances test.** Except as provided in [paragraph (d)](#d) of this section, an agreement by a nongovernmental person to sponsor research performed by a governmental person may result in private business use of the property used for the research, based on all of the facts and circumstances. - (ii) **Research agreements that are properly treated as other types of private business use.** A research agreement with respect to financed property results in private business use of that property if the sponsor is treated as the lessee or owner of financed property for federal income tax purposes, unless an exception under [paragraph (d)](#d) of this section applies to the arrangement. - (7) **Other actual or beneficial use—** - (i) **In general.** Any other arrangement that conveys special legal entitlements for beneficial use of bond proceeds or of financed property that are comparable to special legal entitlements described in paragraphs [(b)(2)](#b-2), [(3)](#b-3), [(4)](#b-4), [(5)](#b-5), or [(6)](#b-6) of this section results in private business use. For example, an arrangement that conveys priority rights to the use or capacity of a facility generally results in private business use. - (ii) **Special rule for facilities not used by the general public.** In the case of financed property that is not available for use by the general public (within the meaning of [paragraph (c)](#c) of this section), private business use may be established solely on the basis of a special economic benefit to one or more nongovernmental persons, even if those nongovernmental persons have no special legal entitlements to use of the property. In determining whether special economic benefit gives rise to private business use it is necessary to consider all of the facts and circumstances, including one or more of the following factors— - (A) Whether the financed property is functionally related or physically proximate to property used in the trade or business of a nongovernmental person; - (B) Whether only a small number of nongovernmental persons receive the special economic benefit; and - (C) **Whether the cost of the financed property is treated as depreciable by any nongovernmental person.** - (c) **Exception for general public use—** - (1) **In general.** Use as a member of the general public (general public use) is not private business use. Use of financed property by nongovernmental persons in their trades or businesses is treated as general public use only if the property is intended to be available and in fact is reasonably available for use on the same basis by natural persons not engaged in a trade or business. - (2) **Use on the same basis.** In general, use under an arrangement that conveys priority rights or other preferential benefits is not use on the same basis as the general public. Arrangements providing for use that is available to the general public at no charge or on the basis of rates that are generally applicable and uniformly applied do not convey priority rights or other preferential benefits. For this purpose, rates may be treated as generally applicable and uniformly applied even if— - (i) Different rates apply to different classes of users, such as volume purchasers, if the differences in rates are customary and reasonable; or - (ii) A specially negotiated rate arrangement is entered into, but only if the user is prohibited by federal law from paying the generally applicable rates, and the rates established are as comparable as reasonably possible to the generally applicable rates. - (3) **Long-term arrangements not treated as general public use.** An arrangement is not treated as general public use if the term of the use under the arrangement, including all renewal options, is greater than 200 days. For this purpose, a right of first refusal to renew use under the arrangement is not treated as a renewal option if— - (i) The compensation for the use under the arrangement is redetermined at generally applicable, fair market value rates that are in effect at the time of renewal; and - (ii) The use of the financed property under the same or similar arrangements is predominantly by natural persons who are not engaged in a trade or business. - (4) **Relation to other use.** Use of financed property by the general public does not prevent the proceeds from being used for a private business use because of other use under this section. - (d) **Other exceptions—** - (1) **Agents.** Use of proceeds by nongovernmental persons solely in their capacity as agents of a governmental person is not private business use. For example, use by a nongovernmental person that issues obligations on behalf of a governmental person is not private business use to the extent the nongovernmental person's use of proceeds is in its capacity as an agent of the governmental person. - (2) **Use incidental to financing arrangements.** Use by a nongovernmental person that is solely incidental to a financing arrangement is not private business use. A use is solely incidental to a financing arrangement only if the nongovernmental person has no substantial rights to use bond proceeds or financed property other than as an agent of the bondholders. For example, a nongovernmental person that acts solely as an owner of title in a sale and leaseback financing transaction with a city generally is not a private business user of the property leased to the city, provided that the nongovernmental person has assigned all of its rights to use the leased facility to the trustee for the bondholders upon default by the city. Similarly, bond trustees, servicers, and guarantors are generally not treated as private business users. - (3) **Exceptions for arrangements other than arrangements resulting in ownership of financed property by a nongovernmental person—** - (i) **Arrangements not available for use on the same basis by natural persons not engaged in a trade or business.** Use by a nongovernmental person pursuant to an arrangement, other than an arrangement resulting in ownership of financed property by a nongovernmental person, is not private business use if— - (A) The term of the use under the arrangement, including all renewal options, is not longer than 100 days; - (B) The arrangement would be treated as general public use, except that it is not available for use on the same basis by natural persons not engaged in a trade or business because generally applicable and uniformly applied rates are not reasonably available to natural persons not engaged in a trade or business; and - (C) The property is not financed for a principal purpose of providing that property for use by that nongovernmental person. - (ii) **Negotiated arm's-length arrangements.** Use by a nongovernmental person pursuant to an arrangement, other than an arrangement resulting in ownership of financed property by a nongovernmental person, is not private business use if— - (A) The term of the use under the arrangement, including all renewal options, is not longer than 50 days; - (B) The arrangement is a negotiated arm's-length arrangement, and compensation under the arrangement is at fair market value; and - (C) The property is not financed for a principal purpose of providing that property for use by that nongovernmental person. - (4) **Temporary use by developers.** Use during an initial development period by a developer of an improvement that carries out an essential governmental function is not private business use if the issuer and the developer reasonably expect on the issue date to proceed with all reasonable speed to develop the improvement and property benefited by that improvement and to transfer the improvement to a governmental person, and if the improvement is in fact transferred to a governmental person promptly after the property benefited by the improvement is developed. - (5) **Incidental use—** - (i) **General rule.** Incidental uses of a financed facility are disregarded, to the extent that those uses do not exceed 2.5 percent of the proceeds of the issue used to finance the facility. A use of a facility by a nongovernmental person is incidental if— - (A) Except for vending machines, pay telephones, kiosks, and similar uses, the use does not involve the transfer to the nongovernmental person of possession and control of space that is separated from other areas of the facility by walls, partitions, or other physical barriers, such as a night gate affixed to a structural component of a building (a nonpossessory use); - (B) The nonpossessory use is not functionally related to any other use of the facility by the same person (other than a different nonpossessory use); and - (C) All nonpossessory uses of the facility do not, in the aggregate, involve the use of more than 2.5 percent of the facility. - (ii) **Illustrations.** Incidental uses may include pay telephones, vending machines, advertising displays, and use for television cameras, but incidental uses may not include output purchases. - (6) **Qualified improvements.** Proceeds that provide a governmentally owned improvement to a governmentally owned building (including its structural components and land functionally related and subordinate to the building) are not used for a private business use if— - (i) The building was placed in service more than 1 year before the construction or acquisition of the improvement is begun; - (ii) The improvement is not an enlargement of the building or an improvement of interior space occupied exclusively for any private business use; - (iii) No portion of the improved building or any payments in respect of the improved building are taken into account under [section 141(b)(2)(A)](/cfr/26/141.md?p=b-2-A) (the private security test); and - (iv) **No more than 15 percent of the improved building is used for a private business use.** - (e) **Special rule for tax assessment bonds.** In the case of a tax assessment bond that satisfies the requirements of [§ 1.141-5(d)](/cfr/26/1.141-5.md?p=d), the loan (or deemed loan) of the proceeds to the borrower paying the assessment is disregarded in determining whether the private business use test is met. However, the use of the loan proceeds is not disregarded in determining whether the private business use test is met. - (f) **Examples.** The following examples illustrate the application of [paragraphs (a) through (e)](#a..e) of this section. In each example, assume that the arrangements described are the only arrangements with nongovernmental persons for use of the financed property. - (g) **Measurement of private business use—** - (1) **In general.** In general, the private business use of proceeds is allocated to property under [§ 1.141-6](/cfr/26/1.141-6.md). The amount of private business use of that property is determined according to the average percentage of private business use of that property during the measurement period. - (2) **Measurement period—** - (i) **General rule.** Except as provided in this [paragraph (g)(2)](#g-2), the measurement period of property financed by an issue begins on the later of the issue date of that issue or the date the property is placed in service and ends on the earlier of the last date of the reasonably expected economic life of the property or the latest maturity date of any bond of the issue financing the property (determined without regard to any optional redemption dates). In general, the period of reasonably expected economic life of the property for this purpose is based on reasonable expectations as of the issue date. - (ii) **Special rule for refundings of short-term obligations.** For an issue of short-term obligations that the issuer reasonably expects to refund with a long-term financing (such as bond anticipation notes), the measurement period is based on the latest maturity date of any bond of the last refunding issue with respect to the financed property (determined without regard to any optional redemption dates). - (iii) **Special rule for reasonably expected mandatory redemptions.** If an issuer reasonably expects on the issue date that an action will occur during the term of the bonds to cause either the private business tests or the private loan financing test to be met and is required to redeem bonds to meet the reasonable expectations test of [§ 1.141-2(d)(2)](/cfr/26/1.141-2.md?p=d-2), the measurement period ends on the reasonably expected redemption date. - (iv) **Special rule for ownership by a nongovernmental person.** The amount of private business use resulting from ownership by a nongovernmental person is the greatest percentage of private business use in any 1-year period. - (v) **Special rule for partners that are nongovernmental persons—** - (A) The amount of private business use by a nongovernmental person resulting from the use of property by a partnership in which that nongovernmental person is a partner is that nongovernmental partner's share of the amount of use of the property by the partnership. For this purpose, except as otherwise provided in [paragraph (g)(2)(v)(B)](#g-2-v-B) of this section, a nongovernmental partner's share of the partnership's use of the property is the nongovernmental partner's greatest percentage share under [section 704(b)](/cfr/26/704.md?p=b) of any partnership item of income, gain, loss, deduction, or credit attributable to the period that the partnership uses the property during the measurement period. For example, if a partnership has a nongovernmental partner and that partner's share of partnership items varies, with the greatest share being 25 percent, then that nongovernmental partner's share of the partnership's use of property is 25 percent. - (B) An issuer may determine a nongovernmental partner's share of the partnership's use of the property under guidance published in the Internal Revenue Bulletin (see [§ 601.601(d)(2)(ii)(b)](/cfr/26/601.601.md?p=d-2-ii-b) of this chapter). - (vi) **Anti-abuse rule.** If an issuer establishes the term of an issue for a period that is longer than is reasonably necessary for the governmental purposes of the issue for a principal purpose of increasing the permitted amount of private business use, the Commissioner may determine the amount of private business use according to the greatest percentage of private business use in any 1-year period. - (3) **Determining average percentage of private business use.** The average percentage of private business use is the average of the percentages of private business use during the 1-year periods within the measurement period. Appropriate adjustments must be made for beginning and ending periods of less than 1 year. - (4) **Determining the average amount of private business use for a 1-year period—** - (i) **In general.** The percentage of private business use of property for any 1-year period is the average private business use during that year. This average is determined by comparing the amount of private business use during the year to the total amount of private business use and use that is not private business use (government use) during that year. [Paragraphs (g)(4)](#g-4) (ii) through (v) of this section apply to determine the average amount of private business use for a 1-year period. - (ii) **Uses at different times.** For a facility in which actual government use and private business use occur at different times (for example, different days), the average amount of private business use generally is based on the amount of time that the facility is used for private business use as a percentage of the total time for all actual use. In determining the total amount of actual use, periods during which the facility is not in use are disregarded. - (iii) **Simultaneous use.** In general, for a facility in which government use and private business use occur simultaneously, the entire facility is treated as having private business use. For example, a governmentally owned facility that is leased or managed by a nongovernmental person in a manner that results in private business use is treated as entirely used for a private business use. If, however, there is also private business use and actual government use on the same basis, the average amount of private business use may be determined on a reasonable basis that properly reflects the proportionate benefit to be derived by the various users of the facility (for example, reasonably expected fair market value of use). For example, the average amount of private business use of a garage with unassigned spaces that is used for government use and private business use is generally based on the number of spaces used for private business use as a percentage of the total number of spaces. - (iv) **Discrete portion.** For purposes of this [paragraph (g)](#g), measurement of the use of proceeds allocated to a discrete portion of a facility is determined by treating that discrete portion as a separate facility. - (v) **Relationship to fair market value.** For purposes of [paragraphs (g)(4)](#g-4) (ii) through (iv) of this section, if private business use is reasonably expected as of the issue date to have a significantly greater fair market value than government use, the average amount of private business use must be determined according to the relative reasonably expected fair market values of use rather than another measure, such as average time of use. This determination of relative fair market value may be made as of the date the property is acquired or placed in service if making this determination as of the issue date is not reasonably possible (for example, if the financed property is not identified on the issue date). In general, the relative reasonably expected fair market value for a period must be determined by taking into account the amount of reasonably expected payments for private business use for the period in a manner that properly reflects the proportionate benefit to be derived from the private business use. - (5) **Common areas.** The amount of private business use of common areas within a facility is based on a reasonable method that properly reflects the proportionate benefit to be derived by the users of the facility. For example, in general, a method that is based on the average amount of private business use of the remainder of the entire facility reflects proportionate benefit. - (6) **Allocation of neutral costs.** Proceeds that are used to pay costs of issuance, invested in a reserve or replacement fund, or paid as fees for a qualified guarantee or a qualified hedge must be allocated ratably among the other purposes for which the proceeds are used. - (7) **Commencement of measurement of private business use.** Generally, private business use commences on the first date on which there is a right to actual use by the nongovernmental person. However, if an issuer enters into an arrangement for private business use a substantial period before the right to actual private business use commences and the arrangement transfers ownership or is an arrangement for other long-term use (such as a lease for a significant portion of the remaining economic life of financed property), private business use commences on the date the arrangement is entered into, even if the right to actual use commences after the measurement period. For this purpose, 10 percent of the measurement period is generally treated as a substantial period. - (8) **Examples.** The following examples illustrate the application of this [paragraph (g)](#g): # §1.141-4. Private security or payment test. - (a) **General rule—** - (1) **Private security or payment.** The private security or payment test relates to the nature of the security for, and the source of, the payment of debt service on an issue. The private payment portion of the test takes into account the payment of the debt service on the issue that is directly or indirectly to be derived from payments (whether or not to the issuer or any related party) in respect of property, or borrowed money, used or to be used for a private business use. The private security portion of the test takes into account the payment of the debt service on the issue that is directly or indirectly secured by any interest in property used or to be used for a private business use or payments in respect of property used or to be used for a private business use. For additional rules for output facilities, see [§ 1.141-7](/cfr/26/1.141-7.md). - (2) **Aggregation of private payments and security.** For purposes of the private security or payment test, payments taken into account as private payments and payments or property taken into account as private security are aggregated. However, the same payments are not taken into account as both private security and private payments. - (3) **Underlying arrangement.** The security for, and payment of debt service on, an issue is determined from both the terms of the bond documents and on the basis of any underlying arrangement. An underlying arrangement may result from separate agreements between the parties or may be determined on the basis of all of the facts and circumstances surrounding the issuance of the bonds. For example, if the payment of debt service on an issue is secured by both a pledge of the full faith and credit of a state or local governmental unit and any interest in property used or to be used in a private business use, the issue meets the private security or payment test. - (b) **Measurement of private payments and security—** - (1) **Scope.** This [paragraph (b)](#b) contains rules that apply to both private security and private payments. - (2) **Present value measurement—** - (i) **Use of present value.** In determining whether an issue meets the private security or payment test, the present value of the payments or property taken into account is compared to the present value of the debt service to be paid over the term of the issue. - (ii) **Debt service—** - (A) **Debt service paid from proceeds.** Debt service does not include any amount paid or to be paid from sale proceeds or investment proceeds. For example, debt service does not include payments of capitalized interest funded with proceeds. - (B) **Adjustments to debt service.** Debt service is adjusted to take into account payments and receipts that adjust the yield on an issue for purposes of [section 148(f)](/cfr/26/148.md?p=f). For example, debt service includes fees paid for qualified guarantees under [§ 1.148-4(f)](/cfr/26/1.148-4.md?p=f) and is adjusted to take into account payments and receipts on qualified hedges under [§ 1.148-4(h)](/cfr/26/1.148-4.md?p=h). - (iii) **Computation of present value—** - (A) **In general.** Present values are determined by using the yield on the issue as the discount rate and by discounting all amounts to the issue date. See, however, [§ 1.141-13](/cfr/26/1.141-13.md) for special rules for refunding bonds. - (B) **Fixed yield issues.** For a fixed yield issue, yield is determined on the issue date and is not adjusted to take into account subsequent events. - (C) **Variable yield issues.** The yield on a variable yield issue is determined over the term of the issue. To determine the reasonably expected yield as of any date, the issuer may assume that the future interest rate on a variable yield bond will be the then-current interest rate on the bonds determined under the formula prescribed in the bond documents. A deliberate action requires a recomputation of the yield on the variable yield issue to determine the present value of payments under that arrangement. In that case, the issuer must use the yield determined as of the date of the deliberate action for purposes of determining the present value of payments under the arrangement causing the deliberate action. See [paragraph (g)](#g) of this section, Example 3. - (iv) **Application to private security.** For purposes of determining the present value of debt service that is secured by property, the property is valued at fair market value as of the first date on which the property secures bonds of the issue. - (c) **Private payments—** - (1) **In general.** This [paragraph (c)](#c) contains rules that apply to private payments. - (2) **Payments taken into account—** - (i) **Payments for use—** - (A) **In general.** Both direct and indirect payments made by any nongovernmental person that is treated as using proceeds of the issue are taken into account as private payments to the extent allocable to the proceeds used by that person. Payments are taken into account as private payments only to the extent that they are made for the period of time that proceeds are used for a private business use. Payments for a use of proceeds include payments (whether or not to the issuer) in respect of property financed (directly or indirectly) with those proceeds, even if not made by a private business user. Payments are not made in respect of financed property if those payments are directly allocable to other property being directly used by the person making the payment and those payments represent fair market value compensation for that other use. See [paragraph (g)](#g) of this section, Example 4 and Example 5. See also [paragraph (c)(3)](#c-3) of this section for rules relating to allocation of payments to the source or sources of funding of property. - (B) **Payments not to exceed use.** Payments with respect to proceeds that are used for a private business use are not taken into account to the extent that the present value of those payments exceeds the present value of debt service on those proceeds. Payments need not be directly derived from a private business user, however, to be taken into account. Thus, if 7 percent of the proceeds of an issue is used by a person over the measurement period, payments with respect to the property financed with those proceeds are taken into account as private payments only to the extent that the present value of those payments does not exceed the present value of 7 percent of the debt service on the issue. - (C) **Payments for operating expenses.** Payments by a person for a use of proceeds do not include the portion of any payment that is properly allocable to the payment of ordinary and necessary expenses (as defined under [section 162](/cfr/26/162.md)) directly attributable to the operation and maintenance of the financed property used by that person. For this purpose, general overhead and administrative expenses are not directly attributable to those operations and maintenance. For example, if an issuer receives $5,000 rent during the year for use of space in a financed facility and during the year pays $500 for ordinary and necessary expenses properly allocable to the operation and maintenance of that space and $400 for general overhead and general administrative expenses properly allocable to that space, $500 of the $5,000 received would not be considered a payment for the use of the proceeds allocable to that space (regardless of the manner in which that $500 is actually used). - (ii) **Refinanced debt service.** Payments of debt service on an issue to be made from proceeds of a refunding issue are taken into account as private payments in the same proportion that the present value of the payments taken into account as private payments for the refunding issue bears to the present value of the debt service to be paid on the refunding issue. For example, if all the debt service on a note is paid with proceeds of a refunding issue, the note meets the private security or payment test if (and to the same extent that) the refunding issue meets the private security or payment test. This [paragraph (c)(2)(ii)](#c-2-ii) does not apply to payments that arise from deliberate actions that occur more than 3 years after the retirement of the prior issue that are not reasonably expected on the issue date of the refunding issue. For purposes of this [paragraph (c)(2)(ii)](#c-2-ii), whether an issue is a refunding issue is determined without regard to [§ 1.150-1(d)(2)(i)](/cfr/26/1.150-1.md?p=d-2-i) (relating to certain payments of interest). - (3) **Allocation of payments—** - (i) **In general.** Private payments for the use of property are allocated to the source or different sources of funding of property. The allocation to the source or different sources of funding is based on all of the facts and circumstances, including whether an allocation is consistent with the purposes of [section 141](/cfr/26/141.md). In general, a private payment for the use of property is allocated to a source of funding based upon the nexus between the payment and both the financed property and the source of funding. For this purpose, different sources of funding may include different tax-exempt issues, taxable issues, and amounts that are not derived from a borrowing, such as revenues of an issuer (equity). - (ii) **Payments for use of discrete property.** Payments for the use of a discrete facility (or a discrete portion of a facility) are allocated to the source or different sources of funding of that discrete property. - (iii) **Allocations among two or more sources of funding.** In general, except as provided in paragraphs [(c)(3)(iv)](#c-3-iv) and [(v)](#c-3-v) of this section, if a payment is made for the use of property financed with two or more sources of funding (for example, equity and a tax-exempt issue), that payment must be allocated to those sources of funding in a manner that reasonably corresponds to the relative amounts of those sources of funding that are expended on that property. If an issuer has not retained records of amounts expended on the property (for example, records of costs of a building that was built 30 years before the allocation), an issuer may use reasonable estimates of those expenditures. For this purpose, costs of issuance and other similar neutral costs are allocated ratably among expenditures in the same manner as in [§ 1.141-3(g)(6)](/cfr/26/1.141-3.md?p=g-6). A payment for the use of property may be allocated to two or more issues that finance property according to the relative amounts of debt service (both paid and accrued) on the issues during the annual period for which the payment is made, if that allocation reasonably reflects the economic substance of the arrangement. In general, allocations of payments according to relative debt service reasonably reflect the economic substance of the arrangement if the maturity of the bonds reasonably corresponds to the reasonably expected economic life of the property and debt service payments on the bonds are approximately level from year to year. - (iv) **Payments made under an arrangement entered into in connection with issuance of bonds.** A private payment for the use of property made under an arrangement that is entered into in connection with the issuance of the issue that finances that property generally is allocated to that issue. Whether an arrangement is entered into in connection with the issuance of an issue is determined on the basis of all of the facts and circumstances. An arrangement is ordinarily treated as entered into in connection with the issuance of an issue if— - (A) The issuer enters into the arrangement during the 3-year period beginning 18 months before the issue date; and - (B) **The amount of payments reflects all or a portion of debt service on the issue.** - (v) **Allocations to equity.** A private payment for the use of property may be allocated to equity before payments are allocated to an issue only if— - (A) Not later than 60 days after the date of the expenditure of those amounts, the issuer adopts an official intent (in a manner comparable to [§ 1.150-2(e)](/cfr/26/1.150-2.md?p=e)) indicating that the issuer reasonably expects to be repaid for the expenditure from a specific arrangement; and - (B) The private payment is made not later than 18 months after the later of the date the expenditure is made or the date the project is placed in service. - (d) **Private security—** - (1) **In general.** This [paragraph (d)](#d) contains rules that relate to private security. - (2) **Security taken into account.** The property that is the security for, or the source of, the payment of debt service on an issue need not be property financed with proceeds. For example, unimproved land or investment securities used, directly or indirectly, in a private business use that secures an issue provides private security. Private security (other than financed property and private payments) for an issue is taken into account under [section 141(b)](/cfr/26/141.md?p=b), however, only to the extent it is provided, directly or indirectly, by a user of proceeds of the issue. - (3) **Pledge of unexpended proceeds.** Proceeds qualifying for an initial temporary period under § [1.148-2(e)(2)](/cfr/26/1.148-2.md?p=e-2) or [(3)](/cfr/26/1.148-2.md?p=e-3) or deposited in a reasonably required reserve or replacement fund (as defined in [§ 1.148-2(f)(2)(i)](/cfr/26/1.148-2.md?p=f-2-i)) are not taken into account under this [paragraph (d)](#d) before the date on which those amounts are either expended or loaned by the issuer to an unrelated party. - (4) **Secured by any interest in property or payments.** Property used or to be used for a private business use and payments in respect of that property are treated as private security if any interest in that property or payments secures the payment of debt service on the bonds. For this purpose, the phrase any interest in is to be interpreted broadly and includes, for example, any right, claim, title, or legal share in property or payments. - (5) **Payments in respect of property.** The payments taken into account as private security are payments in respect of property used or to be used for a private business use. Except as otherwise provided in this [paragraph (d)(5)](#d-5) and [paragraph (d)(6)](#d-6) of this section, the rules in paragraphs [(c)(2)(i)(A)](#c-2-i-A) and [(B)](#c-2-i-B) and (c)(2)(ii) of this section apply to determine the amount of payments treated as payments in respect of property used or to be used for a private business use. Thus, payments made by members of the general public for use of a facility used for a private business use (for example, a facility that is the subject of a management contract that results in private business use) are taken into account as private security to the extent that they are made for the period of time that property is used by a private business user. - (6) **Allocation of security among issues.** In general, property or payments from the disposition of that property that are taken into account as private security are allocated to each issue secured by the property or payments on a reasonable basis that takes into account bondholders' rights to the payments or property upon default. - (e) **Generally applicable taxes—** - (1) **General rule.** For purposes of the private security or payment test, generally applicable taxes are not taken into account (that is, are not payments from a nongovernmental person and are not payments in respect of property used for a private business use). - (2) **Definition of generally applicable taxes.** A generally applicable tax is an enforced contribution exacted pursuant to legislative authority in the exercise of the taxing power that is imposed and collected for the purpose of raising revenue to be used for governmental or public purposes. A generally applicable tax must have a uniform tax rate that is applied to all persons of the same classification in the appropriate jurisdiction and a generally applicable manner of determination and collection. - (3) **Special charges.** A special charge (as defined in this [paragraph (e)(3)](#e-3)) is not a generally applicable tax. For this purpose, a special charge means a payment for a special privilege granted or regulatory function (for example, a license fee), a service rendered (for example, a sanitation services fee), a use of property (for example, rent), or a payment in the nature of a special assessment to finance capital improvements that is imposed on a limited class of persons based on benefits received from the capital improvements financed with the assessment. Thus, a special assessment to finance infrastructure improvements in a new industrial park (such as sidewalks, streets, streetlights, and utility infrastructure improvements) that is imposed on a limited class of persons composed of property owners within the industrial park who benefit from those improvements is a special charge. By contrast, an otherwise qualified generally applicable tax (such as a generally applicable ad valorem tax on all real property within a governmental taxing jurisdiction) or an eligible PILOT under [paragraph (e)(5)](#e-5) of this section that is based on such a generally applicable tax is not treated as a special charge merely because the taxes or PILOTs received are used for governmental or public purposes in a manner which benefits particular property owners. - (4) **Manner of determination and collection—** - (i) **In general.** A tax does not have a generally applicable manner of determination and collection to the extent that one or more taxpayers make any impermissible agreements relating to payment of those taxes. An impermissible agreement relating to the payment of a tax is taken into account whether or not it is reasonably expected to result in any payments that would not otherwise have been made. For example, if an issuer uses proceeds to make a grant to a taxpayer to improve property, agreements that impose reasonable conditions on the use of the grant do not cause a tax on that property to fail to be a generally applicable tax. If an agreement by a taxpayer causes the tax imposed on that taxpayer not to be treated as a generally applicable tax, the entire tax paid by that taxpayer is treated as a special charge, unless the agreement is limited to a specific portion of the tax. - (ii) **Impermissible agreements.** The following are examples of agreements that cause a tax to fail to have a generally applicable manner of determination and collection: an agreement to be personally liable on a tax that does not generally impose personal liability, to provide additional credit support such as a third party guarantee, or to pay unanticipated shortfalls; an agreement regarding the minimum market value of property subject to property tax; and an agreement not to challenge or seek deferral of the tax. - (iii) **Permissible agreements.** The following are examples of agreements that do not cause a tax to fail to have a generally applicable manner of determination and collection: an agreement to use a grant for specified purposes (whether or not that agreement is secured); a representation regarding the expected value of the property following the improvement; an agreement to insure the property and, if damaged, to restore the property; a right of a grantor to rescind the grant if property taxes are not paid; and an agreement to reduce or limit the amount of taxes collected to further a bona fide governmental purpose. For example, an agreement to abate taxes to encourage a property owner to rehabilitate property in a distressed area is a permissible agreement. - (5) **Payments in lieu of taxes.** A tax equivalency payment or other payment in lieu of a tax (“PILOT”) is treated as a generally applicable tax if it meets the requirements of [paragraphs (e)(5)(i) through (iv)](#e-5-i..e-5-iv) of this section— - (i) **Maximum amount limited by underlying generally applicable tax.** The PILOT is not greater than the amount imposed by a statute for a generally applicable tax in each year. - (ii) **Commensurate with a generally applicable tax.** The PILOT is commensurate with the amount imposed by a statute for a generally applicable tax in each year under the commensurate standard set forth in this [paragraph (e)(5)(ii)](#e-5-ii). For this purpose, except as otherwise provided in this [paragraph (e)(5)(ii)](#e-5-ii), a PILOT is commensurate with a generally applicable tax only if it is equal to a fixed percentage of the generally applicable tax that would otherwise apply in each year or it reflects a fixed adjustment to the generally applicable tax that would otherwise apply in each year. A PILOT based on a property tax does not fail to be commensurate with the property tax as a result of changes in the level of the percentage of or adjustment to that property tax for a reasonable phase-in period ending when the subject property is placed in service (as defined in [§ 1.150-2(c)](/cfr/26/1.150-2.md?p=c)). A PILOT based on a property tax must take into account the current assessed value of the property for property tax purposes for each year in which the PILOT is paid and that assessed value must be determined in the same manner and with the same frequency as property subject to the property tax. A PILOT is not commensurate with a generally applicable tax, however, if the PILOT is set at a fixed dollar amount (for example, fixed debt service on a bond issue) that cannot vary with changes in the level of the generally applicable tax on which it is based. - (iii) **Use of PILOTs for governmental or public purposes.** The PILOT is to be used for governmental or public purposes for which the generally applicable tax on which it is based may be used. - (iv) **No special charges.** The PILOT is not a special charge under [paragraph (e)(3)](#e-3) of this section. - (f) **Certain waste remediation bonds—** - (1) **Scope.** This [paragraph (f)](#f) applies to bonds issued to finance hazardous waste clean-up activities on privately owned land (hazardous waste remediation bonds). - (2) **Persons that are not private users.** Payments from nongovernmental persons who are not (other than coincidentally) either users of the site being remediated or persons potentially responsible for disposing of hazardous waste on that site are not taken into account as private security. This [paragraph (f)(2)](#f-2) applies to payments that secure (directly or indirectly) the payment of principal of, or interest on, the bonds under the terms of the bonds. This [paragraph (f)(2)](#f-2) applies only if the payments are made pursuant to either a generally applicable state or local taxing statute or a state or local statute that regulates or restrains activities on an industry-wide basis of persons who are engaged in generating or handling hazardous waste, or in refining, producing, or transporting petroleum, provided that those payments do not represent, in substance, payment for the use of proceeds. For this purpose, a state or local statute that imposes payments that have substantially the same character as those described in Chapter 38 of the Code are treated as generally applicable taxes. - (3) **Persons that are private users.** If payments from nongovernmental persons who are either users of the site being remediated or persons potentially responsible for disposing of hazardous waste on that site do not secure (directly or indirectly) the payment of principal of, or interest on, the bonds under the terms of the bonds, the payments are not taken into account as private payments. This [paragraph (f)(3)](#f-3) applies only if at the time the bonds are issued the payments from those nongovernmental persons are not material to the security for the bonds. For this purpose, payments are not material to the security for the bonds if— - (i) The payments are not required for the payment of debt service on the bonds; - (ii) The amount and timing of the payments are not structured or designed to reflect the payment of debt service on the bonds; - (iii) The receipt or the amount of the payment is uncertain (for example, as of the issue date, no final judgment has been entered into against the nongovernmental person); - (iv) The payments from those nongovernmental persons, when and if received, are used either to redeem bonds of the issuer or to pay for costs of any hazardous waste remediation project; and - (v) In the case when a judgment (but not a final judgment) has been entered by the issue date against a nongovernmental person, there are, as of the issue date, costs of hazardous waste remediation other than those financed with the bonds that may be financed with the payments. - (g) **Examples.** The following examples illustrate the application of this section: # §1.141-5. Private loan financing test. - (a) **In general.** Bonds of an issue are private activity bonds if more than the lesser of 5 percent or $5 million of the proceeds of the issue is to be used (directly or indirectly) to make or finance loans to persons other than governmental persons. [Section 1.141-2(d)](/cfr/26/1.141-2.md?p=d) applies in determining whether the private loan financing test is met. In determining whether the proceeds of an issue are used to make or finance loans, indirect, as well as direct, use of the proceeds is taken into account. - (b) **Measurement of test.** In determining whether the private loan financing test is met, the amount actually loaned to a nongovernmental person is not discounted to reflect the present value of the loan repayments. - (c) **Definition of private loan—** - (1) **In general.** Any transaction that is generally characterized as a loan for federal income tax purposes is a loan for purposes of this section. In addition, a loan may arise from the direct lending of bond proceeds or may arise from transactions in which indirect benefits that are the economic equivalent of a loan are conveyed. Thus, the determination of whether a loan is made depends on the substance of a transaction rather than its form. For example, a lease or other contractual arrangement (for example, a management contract or an output contract) may in substance constitute a loan if the arrangement transfers tax ownership of the facility to a nongovernmental person. Similarly, an output contract or a management contract with respect to a financed facility generally is not treated as a loan of proceeds unless the agreement in substance shifts significant burdens and benefits of ownership to the nongovernmental purchaser or manager of the facility. - (2) **Application only to purpose investments—** - (i) **In general.** A loan may be either a purpose investment or a nonpurpose investment. A loan that is a nonpurpose investment does not cause the private loan financing test to be met. For example, proceeds invested in loans, such as obligations of the United States, during a temporary period, as part of a reasonably required reserve or replacement fund, as part of a refunding escrow, or as part of a minor portion (as each of those terms are defined in [§ 1.148-1](/cfr/26/1.148-1.md) or [§ 1.148-2](/cfr/26/1.148-2.md)) are generally not treated as loans under the private loan financing test. - (ii) **Certain prepayments treated as loans.** Except as otherwise provided, a prepayment for property or services, including a prepayment for property or services that is made after the date that the contract to buy the property or services is entered into, is treated as a loan for purposes of the private loan financing test if a principal purpose for prepaying is to provide a benefit of tax-exempt financing to the seller. A prepayment is not treated as a loan for purposes of the private loan financing test if— - (A) Prepayments on substantially the same terms are made by a substantial percentage of persons who are similarly situated to the issuer but who are not beneficiaries of tax-exempt financing; - (B) The prepayment is made within 90 days of the reasonably expected date of delivery to the issuer of all of the property or services for which the prepayment is made; or - (C) The prepayment meets the requirements of § [1.148-1(e)(2)(iii)(A)](/cfr/26/1.148-1.md?p=e-2-iii-A) or [(B)](/cfr/26/1.148-1.md?p=e-2-iii-B) (relating to certain prepayments to acquire a supply of natural gas or electricity). - (iii) **Customary prepayments.** The determination of whether a prepayment satisfies [paragraph (c)(2)(ii)(A)](#c-2-ii-A) of this section is generally made based on all the facts and circumstances. In addition, a prepayment is deemed to satisfy [paragraph (c)(2)(ii)(A)](#c-2-ii-A) of this section if— - (A) **The prepayment is made for—** (1) Maintenance, repair, or an extended warranty with respect to personal property (for example, automobiles or electronic equipment); or (2) Updates or maintenance or support services with respect to computer software; and - (B) The same maintenance, repair, extended warranty, updates or maintenance or support services, as applicable, are regularly provided to nongovernmental persons on the same terms. - (iv) **Additional prepayments as permitted by the Commissioner.** The Commissioner may, by published guidance, set forth additional circumstances in which a prepayment is not treated as a loan for purposes of the private loan financing test. - (3) **Grants—** - (i) **In general.** A grant of proceeds is not a loan. Whether a transaction may be treated as a grant or a loan depends on all of the facts and circumstances. - (ii) **Tax increment financing—** - (A) **In general.** Generally, a grant using proceeds of an issue that is secured by generally applicable taxes attributable to the improvements to be made with the grant is not treated as a loan, unless the grantee makes any impermissible agreements relating to the payment that results in the taxes imposed on that taxpayer not to be treated as generally applicable taxes under [§ 1.141-4(e)](/cfr/26/1.141-4.md?p=e). - (B) **Amount of loan.** If a grant is treated as a loan under this [paragraph (c)(3)](#c-3), the entire grant is treated as a loan unless the impermissible agreement is limited to a specific portion of the tax. For this purpose, an arrangement with each unrelated grantee is treated as a separate grant. - (4) **Hazardous waste remediation bonds.** In the case of an issue of hazardous waste remediation bonds, payments from nongovernmental persons that are either users of the site being remediated or persons potentially responsible for disposing of hazardous waste on that site do not establish that the transaction is a loan for purposes of this section. This [paragraph (c)(4)](#c-4) applies only if those payments do not secure the payment of principal of, or interest on, the bonds (directly or indirectly), under the terms of the bonds and those payments are not taken into account under the private payment test pursuant to [§ 1.141-4(f)(3)](/cfr/26/1.141-4.md?p=f-3). - (d) **Tax assessment loan exception—** - (1) **General rule.** For purposes of this section, a tax assessment loan that satisfies the requirements of this [paragraph (d)](#d) is not a loan for purposes of the private loan financing test. - (2) **Tax assessment loan defined.** A tax assessment loan is a loan that arises when a governmental person permits or requires property owners to finance any governmental tax or assessment of general application for an essential governmental function that satisfies each of the requirements of [paragraphs (d)](#d) (3) through (5) of this section. - (3) **Mandatory tax or other assessment.** The tax or assessment must be an enforced contribution that is imposed and collected for the purpose of raising revenue to be used for a specific purpose (that is, to defray the capital cost of an improvement). Taxes and assessments do not include fees for services. The tax or assessment must be imposed pursuant to a state law of general application that can be applied equally to natural persons not acting in a trade or business and persons acting in a trade or business. For this purpose, taxes and assessments that are imposed subject to protest procedures are treated as enforced contributions. - (4) **Specific essential governmental function—** - (i) **In general.** A mandatory tax or assessment that gives rise to a tax assessment loan must be imposed for one or more specific, essential governmental functions. - (ii) **Essential governmental functions.** For purposes of [paragraph (d)](#d) of this section, improvements to utilities and systems that are owned by a governmental person and that are available for use by the general public (such as sidewalks, streets and street-lights; electric, telephone, and cable television systems; sewage treatment and disposal systems; and municipal water facilities) serve essential governmental functions. For other types of facilities, the extent to which the service provided by the facility is customarily performed (and financed with governmental bonds) by governments with general taxing powers is a primary factor in determining whether the facility serves an essential governmental function. For example, parks that are owned by a governmental person and that are available for use by the general public serve an essential governmental function. Except as otherwise provided in this [paragraph (d)(4)(ii)](#d-4-ii), commercial or industrial facilities and improvements to property owned by a nongovernmental person do not serve an essential governmental - (5) **Equal basis requirement—** - (i) **In general.** Owners of both business and nonbusiness property benefiting from the financed improvements must be eligible, or required, to make deferred payments of the tax or assessment giving rise to a tax assessment loan on an equal basis (the equal basis requirement). A tax or assessment does not satisfy the equal basis requirement if the terms for payment of the tax or assessment are not the same for all taxed or assessed persons. For example, the equal basis requirement is not met if certain property owners are permitted to pay the tax or assessment over a period of years while others must pay the entire tax or assessment immediately or if only certain property owners are required to prepay the tax or assessment when the property is sold. - (ii) **General rule for guarantees.** A guarantee of debt service on bonds, or of taxes or assessments, by a person that is treated as a borrower of bond proceeds violates the equal basis requirement if it is reasonable to expect on the date the guarantee is entered into that payments will be made under the guarantee. - (6) **Coordination with private business tests.** See §§ [1.141-3](/cfr/26/1.141-3.md) and [1.141-4](/cfr/26/1.141-4.md) for rules for determining whether tax assessment loans cause the bonds financing those loans to be private activity bonds under the private business use and the private security or payment tests. - (e) **Examples.** The following examples illustrate the application of this section: # §1.141-6. Allocation and accounting rules. - (a) **Allocations of proceeds to expenditures, projects, and uses in general—** - (1) **Allocations to expenditures.** The allocations of proceeds and other sources of funds to expenditures under [§ 1.148-6(d)](/cfr/26/1.148-6.md?p=d) apply for purposes of [§§ 1.141-1 through 1.141-15](/cfr/26/1.141-1..1.141-15.md). - (2) **Allocations of sources to a project and its uses.** Except as provided in [paragraph (b)](#b) of this section (regarding an eligible mixed-use project), if two or more sources of funding (including two or more tax-exempt issues) are allocated to capital expenditures (as defined in [§ 1.150-1(b)](/cfr/26/1.150-1.md?p=b)) for a project (as defined in [paragraph (a)(3)](#a-3) of this section), those sources are allocated throughout that project to the governmental use and private business use of the project in proportion to the relative amounts of those sources of funding spent on the project. - (3) **Definition of project—** - (i) **In general.** For purposes of this section, project means one or more facilities or capital projects, including land, buildings, equipment, or other property, financed in whole or in part with proceeds of the issue. - (ii) **Output facilities.** If an output facility has multiple undivided ownership interests (respectively owned by governmental persons or by both governmental and nongovernmental persons), each owner's interest in the facility is treated as a separate facility for purposes of this section, provided that all owners of the undivided ownership interests share the ownership and output in proportion to their contributions to the capital costs of the output facility. - (b) **Special allocation rules for eligible mixed-use projects—** - (1) **In general.** The sources of funding allocated to capital expenditures for an eligible mixed-use project (as defined in [paragraph (b)(2)](#b-2) of this section) are allocated to undivided portions of the eligible mixed-use project and the governmental use and private business use of the eligible mixed-use project in accordance with this [paragraph (b)](#b). Qualified equity (as defined in [paragraph (b)(3)](#b-3) of this section) is allocated first to the private business use of the eligible mixed-use project and then to governmental use, and proceeds are allocated first to the governmental use and then to private business use, using the percentages of the eligible mixed-use project financed with the respective sources and the percentages of the respective uses. Thus, if the percentage of the eligible mixed-use project financed with qualified equity is less than the percentage of private business use of the project, all of the qualified equity is allocated to the private business use. Proceeds are allocated to the balance of the private business use of the project. Similarly, if the percentage of the eligible mixed-use project financed with proceeds is less than the percentage of governmental use of the project, all of the proceeds are allocated to the governmental use, and qualified equity is allocated to the balance of the governmental use of the project. Further, if proceeds of more than one issue finance the eligible mixed-use project, proceeds of each issue are allocated ratably to the uses to which proceeds are allocated in proportion to the relative amounts of the proceeds of such issues allocated to the eligible mixed-use project. For private business use measured under [§ 1.141-3(g)](/cfr/26/1.141-3.md?p=g), qualified equity and proceeds are allocated to the uses of the eligible mixed-use project in each one-year period under [§ 1.141-3(g)(4)](/cfr/26/1.141-3.md?p=g-4). See Example 1 of [paragraph (f)](#f) of this section. - (2) Definition of eligible mixed-use project. Eligible mixed-use project means a project (as defined in [paragraph (a)(3)](#a-3) of this section) that is financed with proceeds of bonds that, when issued, purported to be governmental bonds (as defined in [§ 1.150-1(b)](/cfr/26/1.150-1.md?p=b)) (the applicable bonds) and with qualified equity pursuant to the same plan of financing (within the meaning of [§ 1.150-1(c)(1)(ii)](/cfr/26/1.150-1.md?p=c-1-ii)). An eligible mixed-use project must be wholly owned by one or more governmental persons or by a partnership in which at least one governmental person is a partner. - (3) **Definition of qualified equity.** For purposes of this section, qualified equity means proceeds of bonds that are not tax-advantaged bonds and funds that are not derived from proceeds of a borrowing that are spent on the same eligible mixed-use project as the proceeds of the applicable bonds. Qualified equity does not include equity interests in real property or tangible personal property. Further, qualified equity does not include funds used to redeem or repay governmental bonds. See §§ [1.141-2(d)(2)(ii)](/cfr/26/1.141-2.md?p=d-2-ii) and [1.141-12(i)](/cfr/26/1.141-12.md?p=i) (regarding the effects of certain redemptions as remedial actions). - (4) **Same plan of financing.** Qualified equity finances a project under the same plan of financing that includes the applicable bonds if the qualified equity pays for capital expenditures of the project on a date that is no earlier than a date on which such expenditures would be eligible for reimbursement by proceeds of the applicable bonds under [§ 1.150-2(d)(2)](/cfr/26/1.150-2.md?p=d-2) (regardless of whether the applicable bonds are reimbursement bonds) and, except for a reasonable retainage (within the meaning of [§ 1.148-7(h)](/cfr/26/1.148-7.md?p=h)), no later than the date on which the measurement period begins. - (c) **Allocations of private payments.** Except as provided in this [paragraph (c)](#c), private payments for a project are allocated in accordance with [§ 1.141-4](/cfr/26/1.141-4.md). Payments under an output contract that result in private business use of an eligible mixed-use project are allocated to the same source of funding (notwithstanding [§ 1.141-4(c)(3)(v)](/cfr/26/1.141-4.md?p=c-3-v) (regarding certain allocations of private payments to equity)) allocated to the private business use from such contract under [paragraph (b)](#b) of this section. - (d) **Allocations of proceeds to common costs of an issue.** Proceeds used for expenditures for common costs (for example, issuance costs, qualified guarantee fees, or reasonably required reserve or replacement funds) are allocated in accordance with [§ 1.141-3(g)(6)](/cfr/26/1.141-3.md?p=g-6). Proceeds, as allocated under [§ 1.141-3(g)(6)](/cfr/26/1.141-3.md?p=g-6) to an eligible mixed-use project, are allocated to the uses of the project in the same proportions as the proceeds allocated to the uses under [paragraph (b)](#b) of this section. - (e) **Allocations of proceeds to bonds.** In general, proceeds are allocated to bonds in accordance with the rules for allocations of proceeds to bonds for separate purposes of multipurpose issues in [§ 1.141-13(d)](/cfr/26/1.141-13.md?p=d). For an issue that is not a multipurpose issue (or is a multipurpose issue for which the issuer has not made a multipurpose allocation), proceeds are allocated to bonds ratably in a manner similar to the allocation of proceeds to projects under [paragraph (a)(2)](#a-2) of this section. - (f) **Examples.** The following examples illustrate the application of this section: