Arbitrage Rebate Spending Exception

§ 148. Arbitrage(a) Arbitrage bond definedFor purposes of section 103, the term “arbitrage bond” means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly—(1) to acquire higher yielding investments, or (2) to replace funds which were used directly or indirectly to acquire higher yielding investments. For purposes of this subsection, a bond shall be treated as an arbitrage bond if the issuer intentionally uses any portion of the proceeds of the issue of which such bond is a part in a manner described in paragraph (1) or (2). (b) Higher yielding investmentsFor purposes of this section—(1) In generalThe term “higher yielding investments” means any investment property which produces a yield over the term of the issue which is materially higher than the yield on the issue. (2) Investment propertyThe term “investment property” means—(A) any security (within the meaning of section 165(g)(2)(A) or (B)), (B) any obligation, (C) any annuity contract, (D) any investment-type property, or (E) in the case of a bond other than a private activity bond, any residential rental property for family units which is not located within the jurisdiction of the issuer and which is not acquired to implement a court ordered or approved housing desegregation plan. (3) Alternative minimum tax bonds treated as investment property in certain cases(A) In generalExcept as provided in subparagraph (B), the term “investment property” does not include any tax-exempt bond. (B) ExceptionWith respect to an issue other than an issue a part of which is a specified private activity bond (as defined in section 57(a)(5)(C)), the term “investment property” includes a specified private activity bond (as so defined). (4) Safe harbor for prepaid natural gas(A) In generalThe term “investment-type property” does not include a prepayment under a qualified natural gas supply contract. (B) Qualified natural gas supply contractFor purposes of this paragraph, the term “qualified natural gas supply contract” means any contract to acquire natural gas for resale by a utility owned by a governmental unit if the amount of gas permitted to be acquired under the contract by the utility during any year does not exceed the sum of—(i) the annual average amount during the testing period of natural gas purchased (other than for resale) by customers of such utility who are located within the service area of such utility, and (ii) the amount of natural gas to be used to transport the prepaid natural gas to the utility during such year. (C) Natural gas used to generate electricityNatural gas used to generate electricity shall be taken into account in determining the average under subparagraph (B)(i)—(i) only if the electricity is generated by a utility owned by a governmental unit, and