Rev. Proc. 81-22

Section 1. Purpose

The purpose of this revenue procedure is to amend Rev. Proc. 79-5, 1979-1 C.B. 485, to provide additional guidance for determining whether "substantially all" (90 percent or more) of the proceeds of industrial development bonds will be considered used to provide exempt facilities under section 103(b)(4) of the Internal Revenue Code when excess bond proceeds remain on hand after acquisition or construction has been completed.

Sec. 2. Background

.01 Section 3 of Rev. Proc. 79-5 provides that substantially all of the proceeds of an issue of industrial development bonds will be considered used to provide exempt facilities within the meaning of section 103(b)(4) of the Code if the circumstances described in subsections .01, .02, .03, and .04 are present. Section 3.04 specifically provides that the remaining unexpended bond proceeds not used to redeem outstanding bonds must be placed in escrow for redemption of outstanding bonds at the earliet possible call date. Section 3.04 also states that if all of the bonds were callable at a future date, or were callable only in an amount in excess of the unexpended bond proceeds, all of the unexpended bond proceeds must have been placed in escrow until the entire bond issue is called or the maturity date of the bonds is reached.

.02 Section 3.04 requires that the unexpended bond proceeds be used to redeem outstanding bonds at the earliest possible call date. Because an early redemption will frequently involve the payment of a call premium or penalty, the issuer may incur an unwanted financial burden as a result of complying with section 3.04. Therefore, issuers will not be required to redeem obligations at the earliest possible call date if that action involves the payment of a call premium or penalty.

.03 The thrust of section 3.04 is that unexpended bond proceeds will not be considered in computing whether "substantially all" (90 percent or more) of the bond proceeds were used to provide exempt facilities when such unexpended bond proceeds are used or are placed in escrow to be used to redeem outstanding bonds. The basic requirement in section 3.04 is that the unexpended bond proceeds be used only to reduce outstanding debt. Therefore, this requirement also may be satisfied if the unexpended bond proceeds placed in escrow are used to pay a portion of the annual principal due on serial bonds prior to the earliest call date or after the bonds become callable if the unexpended bond proceeds are insufficient to call the bonds or a call premium or penalty is required.

Sec. 3. Application

New subsections .05 and .06 are added to section 3 of Rev. Proc. 79-5 as follows:

.05 The remaining unexpended bond proceeds placed in escrow are not required to be used for redemption of outstanding bonds at the earliest possible call date if the early redemption necessitates the payment of a call premium or penalty.

.06 The remaining unexpended bond proceeds placed in escrow for redemption of outstanding bonds may, at the option of the issuer of the bonds or the beneficiary of the bond proceeds, be used to pay a portion of the annual principal due on serial bonds (1) in years before the bonds are callable, (2) in years when the bonds are callable, but only in an amount in excess of the unexpended bond proceeds, or (3) in years when the bonds are callable but a call premium or penalty is required for early redemption. The portion of the annual principal payment due on serial bonds that may be paid from the unexpended bond proceeds is an amount that bears the same ratio to the annual principal due that the total unexpended bond proceeds bear to the face amount of the bonds.

Sec. 4. Effect on Other Documents

Rev. Proc. 79-5 is amplified.