Definition of Private Business Use.

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8967] RIN 1545-AY88

TITLE: Definition of Private Business Use

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document amends the final regulations on the
definition of private business use applicable to tax-exempt bonds
issued by State and local governments. The amendments provide that
certain arrangements do not result in private business use if the
term of the use does not exceed 50, 100 or 200 days, as applicable.

DATES: Effective Date: These regulations are effective November 20,
2001. Applicability Date: For dates of applicability, see
§1.141- 15.

FOR FURTHER INFORMATION CONTACT: Michael P. Brewer at (202) 622-
3980 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background Section 103(a) of the Internal Revenue Code (Code)
provides that, generally, interest on any State or local bond is not
included in gross income. However, this exclusion does not apply to
any private activity bond that is not a qualified bond Under section
141, a bond is a private activity bond if it is issued as part of an
issue that meets either the private business use test and the
private security or payment test, or the private loan financing
test.

The private business use test is met if more than 10 percent of the
proceeds of an issue are to be used for any private business use.
Section 141(b)(6)(A) defines the term private business use as use
(directly or indirectly) in a trade or business carried on by any
person other than a governmental unit. For this purpose, use as a
member of the general public is not taken into account.

Section 1.141-3 provides guidance regarding the private business use
test. Generally, 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. The existing
regulations provide the following three special rules for use by
nongovernmental persons under short-term arrangements:

1. Section 1.141-3(c)(3) states that 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 180 days.

2. Section 1.141-3(d)(3)(i) provides that certain arrangements are
not private business use if the term of the use under the
arrangement, including all renewal options, is not longer than 90
days

3. Section 1.141-3(d)(3)(ii) provides that certain arrangements are
not private business use if the term of the use under the
arrangement, including all renewal options, is not longer than 30
days.

Section 1.141-3(f) contains examples that illustrate these special
rules.

Explanation of Provisions

Comments have been received requesting that the regulations provide
for additional flexibility in structuring short-term arrangements
with nongovernmental persons. For example, commentators have
requested that the 180-day, 90-day, and 30-day rules of
§1.141-3 be changed to accommodate six-month, three-month, and
one-month arrangements, respectively (i.e., arrangements with terms
of use based on months that exceed 30 days). This Treasury decision
adopts this suggested modification by amending §1.141-3(c)(3),
(d)(3) and (f) to change all references to 180 days, 90 days, and 30
days to 200 days, 100 days, and 50 days, respectively.

Effective Dates

The changes made by this Treasury decision apply to any bond sold on
or after [INSERT DATE THIS DOCUMENT IS PUBLISHED IN THE FEDERAL
REGISTER]. The changes made by this Treasury decision may be applied
by issuers to any bond outstanding on [INSERT DATE THIS DOCUMENT IS
PUBLISHED IN THE FEDERAL REGISTER] to which §1.141-3 applies.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) and (d) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not apply to these
regulations, and, because no notice of proposed rulemaking is
required, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of the Code, this final
regulation was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.

Drafting Information

The principal authors of these final regulations are Bruce M.
Serchuk and Michael P. Brewer, Office of Chief Counsel (TE/GE), IRS.
However, other personnel from the IRS and Treasury Department
participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements Adoption of
Amendments to the Regulations Accordingly, 26 CFR part 1 is amended
as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows: Authority: 26 U.S.C. 7805 * * *

§1.141-3 [Amended] Par. 2. In the list below, for each
paragraph indicated in the left column, remove the words indicated
in the middle column from wherever they appear in the paragraph, and
add the words indicated in the right column:

Paragraph Remove Add

1.141-3(c)(3), first 180 days 200 days sentence of introductory text

1.141-3(d)(3)(i)(A) 90 days 100 days 1.141-3(d)(3)(ii)(A) 30 days 50
days 1.141-3(f) 180 days 200 days

Example 10, penultimate sentence

1.141-3(f) 180 days 200 days Example 12, third sentence (twice)

1.141-3(f) 180 days 200 days Example 13, fifth sentence

1.141-3(f) 90 days 100 days Example 15, fourth sentence

1.141-3(f) 30 days 50 days Example 16(i), last sentence

Par. 3. Section 1.141-15 is amended as follows:

1. Paragraph (b) is redesignated (b)(1).

2. A paragraph heading for newly designated paragraph (b)(1) is
added

3. Paragraph (b)(2) is added.

The additions read as follows: §1.141-15 Effective dates.

* * * * *

(b) Effective Dates-- (1) In general. * * *

(2) Certain short-term arrangements. The provisions of §1.141-3
that refer to arrangements for 200 days, 100 days, or 50 days apply
to any bond sold on or after November 20, 2001 and may be applied to
any bond outstanding on November 20, 2001 to which §1.141-3
applies.

* * * * *

David A. Mader
Assistant Deputy Commissioner of Internal Revenue.

Approved: November 14, 2001

Mark Weinberger
Assistant Secretary of the Treasury.

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