IRS written determination 201424002

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201424002
Release Date: 6/13/2014
Index Number: 148.00-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
----------------------, ID No. -----------------
Telephone Number:
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Refer Reply To:
CC:FIP:BRANCH 5
PLR-116921-13
Date:
February 25, 2014
LEGEND
Issuer=-----------------------------------------------------
Advance Refunding Bonds=-----------------------------------------------------------------------
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Proposed Tax-Exempt =------------------------------------------------------------------------
Current Refunding Bonds-------------------------------------------------------
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Date 1=-------------------
a=--
b=--
c=--
Dear --------------:
This is in response to your request for a ruling that none of the proceeds of the Advance
Refunding Bonds in the defeasance escrow described below will become transferred
proceeds, under §1.148-9(b) of the Income Tax Regulations, of the proposed tax-
exempt bonds, the proceeds of which are to be used to currently refund a specified
portion of the Advance Refunding Bonds.

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2
FACTS AND REPRESENTATIONS
Issuer makes the following factual representations. Issuer owns, operates, and
maintains a combined water and sewer utility system (the Utility System). Issuer
financed the construction and improvement of the Utility System with a number of
issues of bonds As part of an effort to obtain relief from certain requirements relating to
the use of the Utility System revenues, Issuer issued the Advance Refunding Bonds, on
Date 1, to defease a issues of revenue bonds (the Prior Issues). Certain of the
Advance Refunding Bonds were issued as non-callable bonds. The proceeds of the
Advance Refunding Bonds and the proceeds of a bona fide debt service fund allocable
to the outstanding Prior Issues were deposited in a defeasance escrow fund (the
Escrow) and used to purchase investments to repay the Prior Issues.
Issuer has fully redeemed b of the a Prior Issues (the Discharged Prior Issues) using a
portion of the Escrow. Issuer expects to use the unspent proceeds of the Advance
Refunding Bonds in the Escrow (the Unspent Proceeds) to pay the debt service on the
outstanding bonds of the remaining c Prior Issues (the Outstanding Prior Issues).
Prior to the issuance of the proposed bonds (described below), Issuer proposes to use
the multipurpose allocation rules of §1.148-9(h) to allocate the bonds, proceeds, and
investments of the Advance Refunding Bonds into a separate issues, the purpose of
each of which is to refund one of the Prior Issues. Issuer represents it will allocate the
bonds of the Advance Refunding Bonds ratably to those separate issues and allocate
the sales proceeds based on the present value of the refunded debt service on the Prior
Issues in accordance with §§1.148-9(h)(4)(i) and (ii). It will allocate the investments in
the Escrow purchased with proceeds of the Advance Refunding Bonds, based on the
maturities and amounts of the investments, to the separate issues in accordance with
the debt service payments of the Prior Issues that the respective investments are
expected to pay.
Issuer intends to issue bonds to refund the callable portion of the Advance Refunding
Bonds. Issuer proposes to issue the Proposed Tax-Exempt Current Refunding Bonds
to currently refund the callable Advance Refunding Bonds it will have allocated to the
separate issues the purposes of which are to refund the respective Discharged Prior
Issues and issue taxable bonds (the Proposed Taxable Bonds) to refund the callable
Advance Refunding Bonds it will have allocated to the separate issues the purposes of
which are to refund the respective Outstanding Prior Issues.
LAW AND ANALYSIS
Section 148(a) of the Internal Revenue Code (Code) provides that, for purposes of
§ 103, the term “arbitrage bond” means any bond issued as part of an issue any portion
of the proceeds of which are reasonably expected (at the time of issuance of the bond)
to be used directly or indirectly to acquire higher yielding investments, or to replace

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3
funds which were used directly or indirectly to acquire higher yielding investments. For
purposes of §148(a), a bond shall be treated as an arbitrage bond if the issuer
intentionally uses any portion of the proceeds of the issue of which such bond is a part
in a manner described above.
Section 1.148-0(b) provides that §§1.148-1 through 1.148-11 apply generally for
purposes of the arbitrage restrictions on State and local bonds under §148.
Section 1.148-9(b) provides that when proceeds of the refunding issue discharge any of
the outstanding principal amount of the prior issue, proceeds of the prior issue become
transferred proceeds of the refunding issue and cease to be proceeds of the prior issue.
The amount of proceeds of the prior issue that becomes transferred proceeds of the
refunding issue is an amount equal to the proceeds of the prior issue on the date of that
discharge multiplied by a fraction the numerator of which is the principal amount of the
prior issue discharged with proceeds of the refunding issue on the date of that
discharge and the denominator of which is the total outstanding principal amount of the
prior issue on the date immediately before the date of the discharge. Principal amount
means, in reference to a plain par bond, its stated principal amount, and in reference to
any other bond, its present value.
Section 1.148-9(c)(1)(ii) provides that, when proceeds of a prior issue become
transferred proceeds of a refunding issue, investments (and the related payments and
receipts) of proceeds of the prior issue that are held in a refunding escrow for another
issue are allocated to the transferred proceeds under the ratable allocation method
described in §1.148-9(c)(1)(iii). Section 1.148-9(c)(1)(iii) provides that, under the
ratable allocation method, a ratable portion of each nonpurpose and purpose
investment of proceeds of the prior issue is allocated to transferred proceeds of the
refunding issue.
Section 1.148-9(h)(1) provides that the portion of the bonds of a multipurpose issue
reasonably allocated to any separate purpose under §1.148-9(h) is treated as a
separate issue for all purposes of §148, except for certain arbitrage purposes listed
therein. Such exceptions include determining the yield on a multipurpose issue and the
yield on investments for purposes of the arbitrage yield restrictions of §148 and the
arbitrage rebate requirements of §148(f).
Section 1.148-1(b) defines a multipurpose issue as an issue the proceeds of which are
used for two or more separate purposes determined in accordance with §1.148-9(h).
Section 1.148-9(h)(3)(i) provides, in part, that separate purposes of a multipurpose
issue include refunding a separate prior issue, financing a separate purpose investment,
financing a construction issue (as defined in §1.148-7(f)) and any clearly discrete
governmental purpose reasonably expected to be financed by the issue.

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Section 1.148-9(h)(2)(i) provides that §1.148-9(h) applies to allocationsof multipurpose
issues, including allocations involving the refunding purposes of the issue. Except as
otherwise provided in §1.148-9(h), proceeds, investments, and bonds of a multipurpose
issue may be allocated among the various separate purposes of the issue using any
reasonable, consistently applied allocation method. An allocation is not reasonable if it
achieves more favorable results under sections 148 or 149(d) than could be achieved
with actual separate issues. Allocations under §1.148-9(h) may be made at any time,
but once made may not be changed.
Section 1.148-9(h)(4)(i) provides that after reasonable adjustment of the issue price to
account for common costs, the portion of the bonds of a multipurpose issue allocated to
a separate purpose must have an issue price that bears the same ratio to the aggregate
issue price of the multipurpose issue as the portion of the sale proceeds of the
multipurpose issue used for that separate purpose bears to the aggregate sale
proceeds of the multipurpose issue. For a refunding issue used to refund two or more
prior issues, the portion of the sales proceeds allocated to the refunding of a separate
prior issue is based on the present value of the refunded debt service on that prior
issue, using the yield oninvestments in the refunding escrow allocable to the entire
refunding issue as the discount rate.
Section 1.148-9(h)(4)(ii) provides that the use of the relative amount of sales proceeds
used for each separate purpose to ratably allocate each bond or a ratable number of
substantially identical whole bonds is a reasonable method for allocating bonds of a
multipurpose issue.
Section 1.148-9(h)(4)(v) provides, in part, that for each portion of a multipurpose issue
that is used to refund a separate prior issue, a method of allocating bonds of that issue
is reasonable under §1.148-9(h) if, in addition to the requirements of §§1.148-9(h)(1)
and (2), the portion of the bonds allocated to the refunding of that prior issue results
from a pro rata allocation under §1.148-9(h)(4)(ii).
Section 1.148-9(i)(1) provides that, for purposes of §1.148-9(h)(3)(i), the separate
purposes of a prior issue include the refunded and unrefunded portions of the prior
issue. Thus, the refunded and unrefunded portions are treated as separate issues
under §1.148-9(h)(1). Those separate issues must satisfy the requirements of
§§ 1.148-9(h) and (i). The refunded portion of the bonds of a prior issue is based on the
fraction the numerator of which is the principal amount of the prior issue to be paid with
the proceeds of the refunding issue and the denominator of which is the outstanding
principal amount of the bonds of the prior issue, each determined as of the issue date of
the refunding issue.
Section 1.148-9(i)(2) provides that, as of the issue date of a partial refunding issue
under §1.148-9(i), unspent proceeds of the prior issue are allocated ratably between
the refunded and unrefunded portions of the prior issue and the investments allocable to

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5
those unspent proceeds are allocated in the manner required for the allocation of
investments to transferred proceeds under §1.148-9(c)(1)(ii).
Section 1.148-9(i)(3) provides that if the refunded and unrefunded portions of a prior
issue are treated as separate issues under §1.148-9(i), then, except to the extent that
the context clearly requires otherwise (e.g., references to the aggregate prior issue in
the mixed escrow rule in §1.148-9(c)(2)), all references in §1.148-9 to prior issue refer
only the refunded portion of that prior issue.
When proceeds of a refunding issue discharge any of the outstanding principal of a prior
issue, unspent proceeds of the prior issue become transferred proceeds of the
refunding issue and investments allocated to unspent proceeds of the prior issue are
allocated to those transferred proceeds. For none of the Unspent Proceeds (and
allocable investments) in the Escrow to become transferred proceeds (and investments)
of the Proposed Tax-Exempt Current Refunding Bonds, the Unspent Proceeds (and
investments) must have been allocated to an issue other than one to be refunded by the
Proposed Tax-Exempt Current Refunding Bonds. To achieve this result, Issuer
proposes to apply the multipurpose issue allocation rules to separate the Advance
Refunding Bonds into separate issues. This requires, first, that the Advance Refunding
Bonds be a multipurpose issue, that is, an issue the proceeds of which are used for two
or more separate purposes under 1.148-9(h). Under §1.148-9(h)(3)(i), separate
purposes of a multipurpose issue include refunding of a separate prior issue. The
Advance Refunding Bonds refundeda separate prior issues, i.e., the Prior Issues.
Accordingly, the Advance Refunding Bonds issue is a multipurpose issue.
Second, the Issuer must allocate the bonds, proceeds, and investments of the Advance
Refunding Bonds among the separate purposes using a reasonable, consistently
applied method. Issuer represents that it will allocate the bonds and sale proceeds of
the Advance Refunding Bonds among the separate purposes of refunding the
respective Prior Issues in accordance with §§1.148-9(h)(4)(i) and (ii). As stated in
these provisions and §1.148-9(h)(4)(v) applicable to refunding bonds, these allocations
are reasonable. Further, Issuer will apply these methods consistently to all the bonds
and sale proceeds. Because the present value of the debtservice on the Discharged
Prior Issues is zero as of the date of the multipurpose allocation, no Unspent Proceeds
will be allocated to the b separate issues of the Advance Refunding Bonds the purposes
of which are to refund the respective Discharged PriorIssues.
Issuer will allocate the investments of the Advance Refunding Bonds among the
separate purposes according to the debt service payments of the Prior Issues that the
respective investments are expected to pay. Issuer expects to use all of the
investments remaining in the Escrow to pay debt service on the c Outstanding Prior
Issues, and thus Issuer will allocate all of the investments among the c separate issues
the purposes of which are to refund the respective Outstanding Prior Issues. All
investments allocable to the debt service of the b Discharged Prior Issues have been

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6
liquidated and the proceeds spent to fully repay the Discharged Prior Issues. This
allocation of investments does not achieve more favorable results under §148 or
§ 149(d) than could be achieved with actual separate issues to refund the respective
Prior Issues. Thus, we conclude that Issuer’s method of allocating the investments to
the separate purposes is a reasonable, consistently applied method.
Because Issuer’s methods of allocating the bonds, proceeds, and investments of the
Advance Refunding Bonds among the separate purposes of that issue are reasonable,
consistently applied methods, the bonds allocated to the refunding of each of the Prior
Issues may be treated as separate issues under §1.148-9(h). As a result, all of the
Unspent Proceeds and allocable investments in the Escrow will be allocated among the
separate issues of the Advance Refunding Bonds the respective purposes of which are
to refund one of the Outstanding Prior Issues, and no Unspent Proceeds or investments
will be allocated among the separate issues of the Advance Refunding Bonds the
respective purposes of which are to refund one of the Discharged Prior Issues.
Finally, the Proposed Tax-Exempt Current Refunding Bonds and the Proposed Taxable
Bonds will not refund the non-callable bonds of the Advance Refunding Bonds. In
allocating all of the Advance Refunding Bonds ratably among the a separate purposes,
Issuer will allocate the non-callable bonds ratably among those purposes. Thus, each
of the a separate issues will include non-callable bonds that will not be refunded.
Pursuant to §1.148-9(i), the refunded and unrefunded portions of a prior issue are
separate purposes of the prior issue and treated as separate issues. Further, unspent
proceeds of the prior issue and allocable investments held in a refunding escrow are to
be allocated ratably between the refunded and unrefunded portions. Accordingly, each
of the separate issues within the Advance Refunding Bonds will be further divided into
its refunded and unrefunded portions. Thus, the Unspent Proceeds and allocable
investments to be allocated to each of the separate issues the purpose of which is to
refund one of the Outstanding Prior Issues will be further allocated ratably between the
refunded and unrefunded portions of each of those separate issues of the Advance
Refunding Bonds. Because no Unspent Proceeds or investments will be allocated to
the separate issues of the Advance Refunding Bonds the respective purposes of which
are to refund one of the Discharged Prior Issues, no Unspent Proceeds or investments
will be allocated to the refunded or unrefunded portions of those separate issues.
Accordingly, when proceeds of the Proposed Tax-Exempt Current Refunding Bonds
refund portions of those separate issues of the Advance Refunding Bonds, no Unspent
Proceeds or investments of the Advance Refunding Bonds will become transferred
proceeds of the Proposed Tax-Exempt Current Refunding Bonds.
CONCLUSION

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Accordingly, we conclude that, under the facts and circumstances described above,
none of the Unspent Proceeds or allocable investments of the Advance Refunding
Bonds will become transferred proceeds or investments of the Proposed Tax-Exempt
Current Refunding Bonds under §1.148-9(b).
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.
This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
A copy of this letter must be attached to any return to which it is relevant.
The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.
Sincerely,
Associate Chief Counsel
(Financial Institutions & Products)
/S/
By: ______________________
Johanna Som de Cerff
Senior Technician Reviewer
Branch 5