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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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