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“output facility” is defined as “electric and gas generation,
transmission, distribution, and related facilities, and water
collection, storage, and distribution facilities.” Sec. 1.141-
1(b), Income Tax Regs. If the output facility regulations apply,
any output contract must be analyzed under section 1.141-7(c),
Income Tax Regs., which identifies those contracts that have the
effect of transferring substantial benefits of owning the bond-
financed facility and substantial burdens of paying the debt
service on bonds used to finance the facility (the benefits and
burdens test). The general regulations under section 141(b)(1)
and (2), see secs. 1.141-3 and 1.141-4, Income Tax Regs., then
apply to determine whether other types of arrangements for use of
an output facility cause an issue to meet the private business
tests, sec. 1.141-7(a), Income Tax Regs.
B. Private Business Tests
We must decide whether the proposed bonds meet the private
business use test of section 141(b)(1). If that test is met, we
must then decide whether the proposed bonds meet the private
payment or security test of section 141(b)(2). Our primary focus
is on whether Company’s arrangement with petitioner results in a
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