City of Santa Rosa, California - Page 12

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               The “private security or payment test” of section 141(b)(2)             
          relates to the nature of the security for, and the source of, the            
          payment of debt service on a bond issue.  Sec. 1.141-4(a), Income            
          Tax Regs.  This test is met if the payment of the principal of,              
          or the interest on, more than 10 percent of the proceeds of the              
          bond issue is directly or indirectly:  (1) Secured by any                    
          interest in property used or to be used for a private business               
          use, or payments in respect of such property, or (2) to be                   
          derived from payments (whether or not to the issuer) in respect              
          of property, or borrowed money, used or to be used for a private             
          business use.  Sec. 141(b)(2).14                                             
               The regulations under section 141 provide special rules to              
          determine whether arrangements for the purchase of output from an            
          “output facility” cause an issue of bonds to meet the private                
          business tests.  Sec. 1.141-7(a), Income Tax Regs.15  The term               


               14Payments taken into account as private payments and                   
          payments or property taken into account as private security are              
          aggregated.  Sec. 1.141-4(a)(2), Income Tax Regs.  However, the              
          same payments are not taken into account as both private security            
          and private payments.  Id.                                                   
               15The parties’ arguments on brief cite the temporary                    
          regulations published on Jan. 18, 2001 (66 Fed. Reg. 4661), and              
          effective Jan. 19, 2001.  After the filing of briefs in this                 
          case, final output facility regulations were promulgated and are             
          generally effective with respect to bonds sold on or after Nov.              
          22, 2002.  See sec. 1.141-15(f)(1), Income Tax Regs.  The                    
          provisions in the temporary regulations that the parties rely                
          upon and the provisions in the final regulations do not differ in            
          any material respect.  For convenience, we cite the final                    
          regulations in this opinion.                                                 





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