4.9.1.4 2-Year Expenditure Exception

Under the 2 year rule, an issue is not subject to the rebate requirement if all proceeds (including investment proceeds) except for amounts held in a reserve fund are expended within 2 years from the issue date, provided that all of the following occur:

At least 10% of such proceeds are spent within 6 months.
At least 45% are spent within 12 months.
At least 75% are spent within 18 months.
At least 100% are spent within 24 months.

Compliance with the 2 year exception, like compliance with the 6 month exception, is based on actual expenditures, although the 10%, 45%, and 75% expenditure requirements are measured based on the sale proceeds plus the aggregate investment proceeds expected to be earned during the 2 year period. Additionally, as with the other expenditure exceptions, amounts held in a reserve fund are not treated as bond proceeds for purposes of satisfying the expenditure requirements. The 2 year expenditure exception does not apply to refundings.

In order to qualify for the 2 year expenditure exception, at least 75% of the proceeds of the bond issue must be expected to be expended for construction costs, as opposed to acquisition or refinancing costs. If the 75% construction cost requirement is not expected to be met by the bond issue as a whole, the tax code allows the issuer to treat the bond issue as two separate issues. If one of such issues, the construction portion, meets 75% construction cost requirement, then the construction portion is eligible for the 2 year expenditure exception. The 6 month expenditure exception (but not the 18 month expenditure exception) or the normal rebate requirements would apply to the remaining portion. Special rules apply to pooled financings.