IRS Issues Bond Guidance to Aid Infrastructure Investment


On June 11, the Internal Revenue Service (IRS) issued proposed regulation REG-106977-18, which clarifies a rule that might have forced investors using tax-exempt bonds for infrastructure projects to pay rebates if they made enough income from the project.

The proposed rulemaking deals with tax code section 148, which restricts the use of tax-exempt municipal bond arbitrage, or investing the bonds’ proceeds in “higher yield investments,” such as stocks. Some investors worried that the IRS could interpret “higher yield investments” to include public infrastructure projects financed with tax-exempt bonds. Such an interpretation would require investors to pay the Treasury Department a rebate equal to the excess earnings on the higher yield investments over the tax-exempt bond proceeds, which could drive down the interest in investing in such projects.

The proposed rulemaking would prevent such an interpretation, as the definition subject to arbitrage restrictions would exclude “capital projects that further the public purposes for which tax-exempt bonds are issued,” such as roads, bridges, and other infrastructure.

You can read the entire proposed rulemaking in the Federal Register.