95% Expenditure Requirement for Exempt Facility Bonds


Issue Title:

95% expenditure requirement for exempt facility bonds.


Exempt facility bonds have requirements that 95 % or more of their net proceeds must be used to provide an exempt facility. In certain cases, if the issuer fails to meet these spending requirements, it may remedy that failure by taking certain remedial actions. This issue snapshot discusses the spending rules and the permitted remediation for these bonds.

IRC Section and Treas. Regulation:

IRC Section 142

Treasury Regulation Section 1.142

Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources):

Revenue Ruling 90-51- Issuance Cost as part of 95%


Private activity bonds are generally not exempt from federal income tax. However, the Code allows for tax-advantaged financing for qualified private activity bonds, including exempt facility bonds if 95% of the net proceeds are used to provide an exempt facility. Determining whether 95% of the net proceeds of exempt facility bonds were used for qualified facilities requires determination of (1) the “net proceeds,” and (2) the expenditures to which the net proceeds were allocated.

Net Proceeds. Because bonds described in IRC Section 142 are described in IRC Section 141(e)(1),  use of the definitions related to “proceeds” found in IRC Section 141 would be applicable to determine the "proceeds" unless otherwise noted. Net proceeds are the proceeds of an issue less amounts used to fund a reasonably required reserve or replacement fund, see IRC Section 150(a)(3).

Timing of expenditures. Generally, an allocation of proceeds to an expenditure involves a current outlay of cash for a qualified purpose of the issue.

Qualified purposes. The expenditures to which the proceeds are allocated must be qualified purposes for the applicable type of bond issue, as provided in the IR Section 142 relating to the applicable bond type.

Remedial actions. To the extent that less than 95 percent of the net proceeds are actually used to provide an exempt facility, the issuer must redeem or defease nonqualified bonds within 90 days of the failure to properly use the proceeds. See Treasury Regulation Section 1.142-2.

Issue Indicators or Audit Tips:

Follow the Money. Although an issuer may apply any reasonable, consistently applied accounting method to account for the proceeds of an issue, if an issuer fails to maintain records sufficient to establish the accounting method for an issue, IRC Section 148-6(a)(3) provides that the specific tracing method will be applied to determine how the bond proceeds were allocated.

  • IRC Section 147(g) provides that only 2% of the proceeds of an exempt facility bond may be applied to pay bond costs of issuance and such costs are not treated as used to provide the exempt facility.
  • Treasury Regulation Section 1.148-6(d)(7) provides any payment of gross proceeds of the issue to a related party of the payer is not an expenditure of those gross proceeds.
  • IRC Section 147(d)(4)(e) provides that no proceeds of a private activity bond be used to provide an airplane, a private luxury box, certain health club facilities, a gambling facility or a liquor store.

Timing. A failure to properly use proceed occurs:

  • When there are net proceeds remaining on the earlier of the date on which the issuer reasonably determines that the financed facility will not be completed or the date the facility is placed in service, or
  • On the date in which the issuer takes an action that caused the bonds to fail to be used for the qualified purpose for which they were issued.