In a Notice, the IRS has temporarily expanded the circumstances and time periods in which a tax-exempt bond that is purchased by its state or local governmental issuer is treated as continuing in effect without resulting in a reissuance or retirement of the purchased tax-exempt bond solely for purposes of Code Sec. 103 and Code Sec. 141 through Code Sec. 150 (the requirements for the interest on those bonds to be exempt from Federal income tax).
Background.
In general, under Code Sec. 103, interest received by the holders of certain bonds issued by State and local governments is exempt from Federal income tax. To qualify for the tax exemption, a bond must satisfy various eligibility requirements under Code Sec. 141 through Code Sec. 150 at the time the bond is issued.
the issuer and holder agree after issuance to modify the terms of a tax-exempt bond significantly, the original bond may be treated as having been retired and exchanged for a newly issued, modified bond. Similarly, if the issuer or its agent acquires and resells the bond, the bond may be treated as having been retired upon acquisition and replaced upon resale with a newly issued bond. The term “reissuance” commonly refers to the effect of a transaction in which a new debt instrument replaces an old debt instrument as a result of retirement of the old debt instrument pursuant to such an exchange or extinguishment. In the case of a reissuance, the reissued bond must be retested for qualification under Code Sec. 103 and Code Sec. 141 through Code Sec. 150.
Notice 2008-41, 2008-1 CB 742, provides rules for determining when a tax-exempt bond is retired for purposes of Code Sec. 103 and Code Sec. 141 through Code Sec. 150.
Generally, under Notice 2008-41, a tax-exempt bond is retired when a significant modification to the terms of the bond occurs under Reg § 1.1001-3, the bond is acquired by or on behalf of its issuer, or the bond is otherwise redeemed or retired. Notice 2008-41 clarifies that, for purposes of these retirement standards, the purchase of a tax-exempt bond by a third-party guarantor or third-party liquidity facility provider pursuant to the terms of the guarantee or liquidity facility, is not treated as a purchase or other acquisition by or on behalf of a governmental issuer.
IRS has issued proposed regs that provide retirement standards that apply to tax-exempt bonds for purposes of Code Sec. 103 and Code Sec. 141 through Code Sec. 150. (Prop Reg § 1.150-3(a)) The retirement standards generally follow the guidance in Notice 2008-41. See Proposed regs clarify when tax-exempt bonds, including tender option bonds, are retired (12/31/2018).
Pursuant to the preamble to the proposed regulations, issuers may apply Prop Reg § 1.150-3 to events and actions taken with respect to bonds that occur before the date that is 90 days after the date of publication of the Treasury decision adopting those rules as final regulations in the Federal Register. (Notice 2020-25, Sec. 2, 2020-22 IRB)
Expanded temporary rule allowing governmental issuers to purchase their own tax-exempt bonds.
Solely for purposes of Code Sec. 103 and Code Sec. 141 through Code Sec. 150, the IRS will treat a tax-exempt qualified tender bond or tax-exempt commercial paper (defined below) that is purchased by its governmental issuer on a temporary basis as continuing in effect without resulting in a reissuance or retirement of the purchased tax-exempt bond if the governmental issuer purchases the tax-exempt qualified tender bond or tax-exempt commercial paper during the permitted holding period (defined below) and holds the bond no later than the end of the permitted holding period.
Thus, recognizing that the purchased bond is treated as continuing in effect without resulting in a reissuance or retirement of that bond solely for purposes of Code Sec. 103 and Code Sec. 141 through Code Sec. 150 during the permitted holding period, the governmental issuer may refund the purchased bond with a refunding bond, tender the purchased bond for purchase in a qualified tender right in its capacity as a bondholder, or otherwise resell the purchased bond during this permitted holding period.
Further, in the case of the purchase of any particular obligation of tax-exempt commercial paper, including a purchase of such a particular obligation at maturity, a refinancing of that purchased tax-exempt commercial paper with tax-exempt commercial paper during the permitted holding period will be treated as part of the same issue as the issue of which the purchased tax-exempt commercial paper was a part. (Notice 2020-25, Sec. 3.2)
For purposes of the Notice, the term “permitted holding period” means calendar year 2020. (Notice 2020-25, Sec. 3.1)
For purposes of the Notice, the term “tax-exempt commercial paper” means tax-exempt bonds issued pursuant to the same commercial paper program that are treated as a single issue under Reg § 1.150-1(c)(4)(ii). (Notice 2020-25, Sec. 2)
Extension of purchase date for the 180-day holding period. Notice 2008-41, Sec. 3.2(3)(b) (regarding operating rules for purchases pursuant to a qualified tender right) is supplemented to provide that the 90-day period is extended to 180 days with respect to any purchase by or on behalf of a governmental issuer pursuant to a qualified tender right as long as such purchase occurs during the permitted holding period. (Notice 2020-25, Sec. 3.3)
Coordination with proposed regs. Issuers that apply the proposed regs to a bond may apply Section 3.2 of the Notice to that bond. In addition, issuers that apply the proposed regs to a bond may apply Prop Reg §1.150-3(c)(2) by extending the 90-day period referenced therein to 180 days, provided that the acquisition of the qualified tender bond occurs within the permitted holding period. (Notice 2020-25, Sec. 3.5)
No inferences on law. Except with respect to the administrative relief expressly provided in the Notice, no inference should be drawn from the Notice regarding any other Federal tax issues affecting tax-exempt bonds or any other security. In addition, this Notice is not intended to address any other Federal tax issue implicated in the transactions described in the Notice allowing governmental issuers to purchase their own tax-exempt bonds on a temporary basis in prescribed circumstances. (Notice 2020-25, Sec. 3.6)
Not. 2008-41 modified and supplemented. The Notice modifies and supplements Notice 2008-41. (Notice 2020-25, Sec. 4)
Effective date.
The Notice is effective May 4, 2020. Issuers may apply the Notice retroactively to purchases on or after January 1, 2020. (Notice 2020-25, Sec. 5)
To continue your research on retirement of tax-exempt bonds, see FTC 2d/FIN J-3009.1.
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