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What is a Conduit Borrower [Internal Revenue]? A Comprehensive Guide
Definition & Meaning
The term conduit borrower refers to an entity that borrows funds from a bond issuer to finance a specific governmental purpose. According to the Internal Revenue Code, a conduit borrower is the obligor on a purpose investment, which may include loans, leases, or similar obligations. Essentially, if an issuer uses the proceeds from a bond to provide financing to another entity, and that entity uses the funds to fulfill a governmental purpose, it is considered a conduit borrower.
Table of content
Legal Use & context
Conduit borrowers are commonly referenced in the context of municipal finance and tax-exempt bonds. This term is significant in areas such as:
Public finance
Tax law
Municipal bonds
Individuals or entities acting as conduit borrowers may need to complete specific forms or follow procedures outlined in legal templates, which can often be found on platforms like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A city issues bonds to raise funds and lends the proceeds to a local nonprofit organization. The nonprofit uses the funds to build a community center, making it a conduit borrower.
Example 2: A state issues bonds to finance a highway project and provides the funds to a construction company. The construction company, using the funds for the project, is considered a conduit borrower. (hypothetical example)
Relevant laws & statutes
The primary regulation governing conduit borrowers is found in the Internal Revenue Code, specifically under:
26 CFR 1.150-1 - This section outlines the definitions and requirements regarding tax-exempt bonds.
26 CFR 1.148-1 - This section defines purpose investments and related terms.
Comparison with related terms
Term
Definition
Difference
Conduit Financing
A financing arrangement where a third party borrows funds on behalf of another.
Conduit borrowing specifically refers to the borrower using funds for a governmental purpose.
Obligor
The party responsible for repaying a loan or obligation.
A conduit borrower is a specific type of obligor tied to purpose investments.
Common misunderstandings
What to do if this term applies to you
If you believe you are acting as a conduit borrower, it is essential to:
Understand the specific requirements for using the funds.
Consult legal resources or templates available on US Legal Forms to ensure compliance.
Consider seeking professional legal advice if your situation is complex.
Find the legal form that fits your case
Browse our library of 85,000+ state-specific legal templates.
Varies based on the bond issue and legal requirements.
Jurisdiction
Federal and state laws apply.
Possible Penalties
Tax implications if funds are misused.
Key takeaways
Frequently asked questions
A conduit borrower is an entity that receives funds from a bond issuer to finance a governmental purpose.
To become a conduit borrower, an entity must use the funds for a specified governmental purpose and meet the criteria set by the Internal Revenue Code.
Yes, there are legal forms available that can help manage the obligations and requirements of being a conduit borrower.