On July 18, 2016, the Treasury Department published final regulations on non-issue price arbitrage restrictions (the “Final Regulations”). A copy of the Final Regulations is available here. Since that time, the mid-afternoon naps of issuers, tax lawyers, and possibly Sean from Portlandia have been improved by reading my “comprehensive” blog post on the Final Regulations.
Among other things, the Final Regulations included substantial changes to the working capital financing rules. One such change is to the definition of “available amount” in Section 1.148-6(d)(3)(iii)(A). Very generally, tax-exempt bond proceeds can be used to finance working capital expenditures only to the extent that the working capital expenditures exceed the issuer’s “available amounts.” Under the prior rules, available amounts excluded proceeds of the bond issue that would finance working capital, but included proceeds from the issuer’s other tax-exempt bond issues. Bob Eidnier pointed out an unintended consequence of the prior rules in his blog post on the Final Regulations:
Under the prior rule, for example, an issuer with multiple working capital issues outstanding might have been required to invest the proceeds of one issue in Non-AMT Investments (or use the amounts to redeem bonds) in order for the other issue to satisfy the investment/redemption requirement. This could have defeated the purpose of, or at least placed an unfair burden on, the working capital financings . . . .
To remedy this unintended consequence, the Final Regulations expanded the exclusions from available amounts to include proceeds of “any” issue. Once effective, the modified definition in the Final Regulations makes it easier for issuers to finance working capital expenditures.
Generally, the Final Regulations apply to bonds sold on or after October 17, 2016; however, the Final Regulations (more specifically, Section 1.148-11(k)(1)) failed to include an effective date for the modified definition of available amount in Section 1.148-6(d)(3)(iii)(A). Practitioners (and Sean) were left to wonder whether the Treasury erred in omitting an effective date or whether the error was intentional! <cue Twilight Zone music>
Thankfully, fourteen (14) months later, the matter is resolved. Earlier this week, the Treasury Department acknowledged the error and corrected the mistake by including Section 1.148-6(d)(3)(iii)(A) in the list of Regulations that apply to bonds sold on or after October 17, 2016. The correction is available here.