n-02-52.pdf

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Clarification of Proposed Regulations Relating to Tax-exempt Bonds Issued by
State or Local Governments (REG-113526-98; REG-105369-00)

Notice 2002-52

PURPOSE

On April 17, 2002, the Treasury Department and the Internal Revenue
Service published in the Federal Register proposed regulations under sections
141 and 148 of the Internal Revenue Code relating to tax-exempt bonds issued
by state or local governments (REG-113526-98; REG-105369-00) (the proposed
regulations). This notice clarifies the application of certain provisions of the
proposed regulations relating to natural gas prepayments.

BACKGROUND

The proposed regulations propose to amend the definition of private loan
in § 1.141-5(c) and the definition of investment-type property in § 1.148-1(e). In
particular, the proposed regulations address the circumstances in which a
prepayment for property or services will be treated as a loan for purposes of the
private loan financing test of section 141(c), or will give rise to investment-type
property under section 148(b)(2)(D). Among other things, the proposed
regulations add an exception to the definitions of private loan and investment-
type property for natural gas prepayments that meet certain requirements set
forth in § 1.148-1(e)(2)(ii) of the proposed regulations.

Section 1.148-1(e)(2)(ii)(C) of the proposed regulations states that a
transaction will not fail to qualify for this exception by reason of any commodity
swap contract that may be entered into between the issuer and an unrelated
party (other than the gas supplier), or between the gas supplier and an unrelated
party (other than the issuer), so long as each swap contract is an independent
contract. For this purpose, § 1.148-1(e)(2)(ii)(C) provides that a swap contract is
an independent contract if the obligation of each party to perform under the swap
contract is not dependent on performance by any person (other than the other
party to the swap contract) under another contract (for example, a gas supply
contract or another swap contract).

Questions have arisen regarding the characterization in § 1.148-
1(e)(2)(ii)(C) of when a swap contract will constitute an independent contract.
Comments have been received indicating that the practices and policies of
certain state and local governments require that if an issuer enters into a
commodity swap contract, the swap contract must terminate if the supplier of the
commodity being hedged fails to deliver the commodity to the issuer.

CLARIFICATION OF PROPOSED REGULATIONS

For purposes of § 1.148-1(e)(2)(ii)(C) of the proposed regulations, a
natural gas commodity swap contract will not fail to be an independent contract
solely because the swap contract may terminate in the event of a failure of a gas
supplier to deliver gas for which the swap contract is a hedge. Comments are
requested on the limitations on commodity swap contracts contained in § 1.148-
1(e)(2)(ii)(C) of the proposed regulations.

Issuers may rely on this notice as if it were included in the proposed
regulations.

FURTHER INFORMATION

For further information regarding this notice, contact Johanna Som de
Cerff at (202) 622-3980 (not a toll free call).
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