(i) In general.
Except as otherwise provided in this paragraph (d)(3) or paragraph (d)(4) of this section, proceeds of an issue may only be allocated to working capital expenditures as of any date to the extent that those working capital expenditures exceed available amounts (as defined in paragraph (d)(3)(iii) of this section) as of that date (i.e., a “proceeds-spent-last” method). For this purpose, proceeds include replacement proceeds described in section 1.148-1(c)(4).
(ii) Exceptions --
(A) General de minimis exception.
Paragraph (d)(3)(i) of this section does not apply to expenditures to pay --
(1) Any issuance costs of the issue or any qualified administrative costs within the meaning of section 1.148-5(e)(2)(i) or (ii), or section 1.148- 5(e)(3)(ii)(A);
(2) Fees for qualified guarantees of the issue or payments for a qualified hedge for the issue;
(3) Interest on the issue for a period commencing on the issue date and ending on the date that is the later of three years from the issue date or one year after the date on which the project is placed in service;
(4) Amounts paid to the United States under section 1.148-3, 1.148-5(c), or 1.148-7 for the issue;
(5) Costs, other than those described in paragraphs (d)(3)(ii)(A)(1) through (4) of this section, that do not exceed 5 percent of the sale proceeds of an issue and that are directly related to capital expenditures financed by the issue (e.g., initial operating expenses for a new capital project);
(6) Principal or interest on an issue paid from unexpected excess sale or investment proceeds; and
(7) Principal or interest on an issue paid from investment earnings on a reserve or replacement fund that are deposited in a bona fide debt service fund.
(B) Exception for extraordinary items.
Paragraph (d)(3)(i) of this section does not apply to expenditures for extraordinary, nonrecurring items that are not customarily payable from current revenues, such as casualty losses or extraordinary legal judgments in amounts in excess of reasonable insurance coverage. If, however, an issuer or a related party maintains a reserve for such items (e.g., a self-insurance fund) or has set aside other available amounts for such expenses, gross proceeds within that reserve must be allocated to expenditures only after all other available amounts in that reserve are expended.
(C) Exception for payment of principal and interest on prior issues.
Paragraph (d)(3)(i) of this section does not apply to expenditures for payment of principal, interest, or redemption prices on a prior issue and, for a crossover refunding issue, interest on that issue.
(D) No exceptions if replacement proceeds created.
The exceptions provided in this paragraph (d)(3)(ii) do not apply if the allocation merely substitutes gross proceeds for other amounts that would have been used to make those expenditures in a manner that gives rise to replacement proceeds. For example, if a purported reimbursement allocation of proceeds of a reimbursement bond does not result in an expenditure under section 1.150-2, those proceeds may not be allocated to pay interest on an issue that, absent this allocation, would have been paid from the issuer’s current revenues.
(iii) Definition of available amount --
(A) In general.
For purposes of this paragraph (d)(3), AVAILABLE AMOUNT means any amount that is available to an issuer for working capital expenditure purposes of the type financed by an issue. Except as otherwise provided, AVAILABLE AMOUNT excludes proceeds of the issue but includes cash, investments, and other amounts held in accounts or otherwise by the issuer or a related party if those amounts may be used by the issuer for working capital expenditures of the type being financed by an issue without legislative or judicial action and without a legislative, judicial, or contractual requirement that those amounts be reimbursed.
(B) Reasonable working capital reserve treated as unavailable.
A reasonable working capital reserve is treated as unavailable. Any working capital reserve is reasonable if it does not exceed 5 percent of the actual working capital expenditures of the issuer in the fiscal year before the year in which the determination of available amounts is made. For this purpose only, in determining the working capital expenditures of an issuer for a prior fiscal year, any expenditures (whether capital or working capital expenditures) that are paid out of current revenues may be treated as working capital expenditures.
(C) Qualified endowment funds treated as unavailable.
For a 501(c)(3) organization, a qualified endowment fund is treated as unavailable. A fund is a qualified endowment fund if --
(1) The fund is derived from gifts or bequests, or the income thereon, that were neither made nor reasonably expected to be used to pay working capital expenditures;
(2) Pursuant to reasonable, established practices of the organization, the governing body of the 501(c)(3) organization designates and consistently operates the fund as a permanent endowment fund or quasi-endowment fund restricted as to use; and
(3) There is an independent verification that the fund is reasonably necessary as part of the organization‘s permanent capital.
(D) Application to staturory safe harbor for tax and revenue anticipation bonds.
For purposes of section 148(f)(4)(B)(iii)(II), available amount has the same meaning as in paragraph (d)(3)(iii) of this section, except that the otherwise-permitted reasonable working capital reserve is treated as part of the available amount.