Maturity Limitation for Certain Private Activity Bonds

This issue snapshot addresses the maturity limitations imposed on certain private activity bonds that must be satisfied in order for these private activity bonds to be qualified private activity bonds.

IRC Section and Treas. Regulation

Section 147(b) of the Internal Revenue Code of 1986

Section 103(b)(14) of the Internal Revenue Code of 1954

Regulations Section 1.147(b)-1

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

Rev. Proc. 62-21, 1962-2 C.B. 418

Rev. Proc. 87-56, 1987-2 C.B. 674

Analysis

To prevent bonds from remaining outstanding longer than necessary, Section 147(b) limits the average length of maturity of certain qualified private activity bonds.

General Rule: Section 147(b)(1) provides that a private activity bond is not a qualified private activity bond if it is issued as part of an issue and the average maturity of the bonds issued as part of such issue exceeds 120 percent of the average reasonably expected economic life of the facilities being financed with the net proceeds of such issue.

Exceptions: Section 147(b)(5) provides that the maturity limitation of Section 147(b)(1) does not apply to bonds issued as part of an issue 95 percent or more of the net proceeds of which finance mortgage loans insured under "FHA 242" or a similar FHA program (as in effect on the date of enactment of the 1986 ACT) where the mortgage loan term plus the maturity of the debentures which could be issued by FHA in satisfaction of its obligations exceeds the term permitted under Section 147(b)(1).

Section 147(h) provides an exception to the maturity limitation of Section 147(b) for qualified mortgage bonds, qualified veterans’ bonds and qualified student loan bonds.

Regulations Section 1.147(b)-1 provides that Section 147(b) does not apply to bonds the proceeds of which are used to finance working capital expenditures. Working capital expenditure, as defined in Regulations Section 1.150-1(b), is any cost that is not a capital expenditure and generally includes current operating expenses.

Special Rule: Section 147(b)(4) provides a special rule for qualified 501(c)(3) bonds that are part of a pooled financing, at the election of the issuer. A qualified 501(c)(3) bond satisfies the maturity limitation of Section 147(b) if:

  • 95 percent or more of the net proceeds of the issue are to be used to make or finance loans to 2 or more 501(c)(3) organization or governmental units for acquisition of property to be used by such organization;
  • each loan satisfies the maturity limitation (determined by treating each loan as a separate issue);
  • before such bond is issued, a demand survey was conducted that shows a demand for financing greater than the amount equal to 120 percent of the lendable proceeds of the issue; and
  • 95 percent or more of the net proceeds of the issue are to be loaned to 501(c)(3) organizations or governmental units within 1 year of issuance and, to the extent there are any unspent proceeds after such 1-year period, bonds of the issue are to be redeemed as soon as possible thereafter (and in no event later than 18 months after issuance).

1954 Code: The predecessor to Section 147(b) is Section 103(b)(14) of the 1954 Code. However, Section 103(b)(14) did not contain the special rule for 501(c)(3) pooled bond financings or the FHA insured loans exception.

Determination of Averages: The determination of averages for purposes of Section 147(b)(1) is found in Section 147(b)(2). Specifically, Section 147(b)(2)(A) provides that the average maturity of any issue shall be determined by taking into account the respective issue prices of the bonds issued as part of such issue. Issue Price is defined in Regulations Section 1.148-1(f) and may not equate to the par amount of the bonds for any maturity.

Section 147(b)(2)(B) provides that the average reasonably expected economic life of the facilities being financed with any issue shall be determined by taking into account the respective cost of such facilities.

Determination Dates: Section 147(b)(3)(A) provides that the reasonably expected economic life of any facility shall be determined as of the later of:

  • The date the bonds were issued; or
  • The date on which the facility is placed in service (or expected to be placed in service).

Determination of Economic Life: Conference Report No. 97-760, at 519-520 (1982), 1982-2 C.B. 624, states:

In general, the economic life of assets is determined on a case-by-case basis. However, in order to provide guidance and certainty, the conferees intend that the administrative guidelines established for the useful lives used for depreciation prior to the ACRS system (i.e., the midpoint lives under the ADR system where applicable and the guideline lives under Rev. Proc. 62-21, 1962-2 C.B. 418, in the case of structures) may be used to establish the economic lives of assets. However, the taxpayer can issue bonds with maturities longer than these administrative guidelines would allow where the taxpayer can show, on the basis of the facts and circumstances that the economic life to the principal user or users of the assets for whom the bonds are issued is longer than the lives established by the administrative guidelines.

See also Rev. Proc. 87-56, 1987-2 C.B. 674, for administrative guidelines.

Treatment of Land: Section 147(b)(3)(B) provides that land financed by bond proceeds is only taken into account in the average reasonably expected economic life calculation if 25 percent or more of the net proceeds of any issue is used to acquire the land. If less than 25 percent of the net proceeds of any issue are used to acquire the land, the average reasonably expected economic life calculation will not include land. If land is included in the average reasonably expected economic life calculation, land is treated as having an economic life of 30 years.

Issue Indicators or Audit Tips

  • The Form 8038 relating to private activity bonds requires an issuer to disclose the weighted average maturity of such bonds and the weighted average economic life of the bond-financed facilities. Additionally, often times the supporting calculations for these amounts can be found attached to the tax certificate or non-arbitrage certificate.
  • Section 147(b) does not apply to qualified mortgage bonds, qualified veteran’s bonds and qualified student loan bonds.
  • Section 147(b) does not apply to bond proceeds used to finance working capital expenditures. From a practical standpoint, working capital does not have a measurable economic life.
  • Land is only taken into account when measuring the average reasonably expected economic life if 25 percent or more of the net proceeds is used to acquire the land.