[Federal Register Volume 81, Number 237 (Friday, December 9, 2016)]
[Rules and Regulations]
[Pages 88999-89004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29486]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9801]
RIN 1545-BM46
Issue Price Definition for Tax-Exempt Bonds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations on the definition of
issue price for purposes of the arbitrage investment restrictions that
apply to tax-exempt bonds and other tax-advantaged bonds. These final
regulations affect State and local governments that issue tax-exempt
bonds and other tax-advantaged bonds.
DATES: Effective date: These regulations are effective on December 9,
2016.
Applicability date: For the date of applicability, see Sec. 1.148-
11(m).
FOR FURTHER INFORMATION CONTACT: Lewis Bell at (202) 317-6980 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-1347. The collection of information
in these final regulations is in Sec. 1.148-1(f)(2)(ii), which
requires the underwriter to provide to the issuer a certification and
reasonable supporting documentation for use of the initial offering
price to the public, Sec. 1.148-1(f)(2)(iii), which requires the
issuer to obtain a certification from the underwriter for competitive
sales, and Sec. 1.148-1(f)(2)(iv), which requires the issuer to
identify in its books and records the rule used to determine the issue
price of the bonds. The respondents are issuers of tax-exempt bonds
that want to apply the special rules in Sec. 1.148-1(f)(2) to
determine the issue price of the bonds.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally tax returns and
tax return information are confidential, as required by section 6103.
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) on the arbitrage investment restrictions under section 148
of the Internal Revenue Code (Code). On June 18, 1993, the Department
of the Treasury (Treasury Department) and the IRS published
comprehensive final regulations in the Federal Register (TD 8476, 58 FR
33510) on the arbitrage investment restrictions and related provisions
for tax-exempt bonds under sections 103, 148, 149, and 150. Since that
time, those final regulations have been amended in various limited
respects, including most recently in final regulations published in the
Federal Register (TD 9777, 81 FR 46582) on July 18, 2016 (the
regulations issued in 1993 and the various amendments thereto are
collectively referred to as the Existing Regulations).
A notice of proposed rulemaking was published in the Federal
Register (78 FR 56842; REG-148659-07) on
[[Page 89000]]
September 16, 2013 (the 2013 Proposed Regulations), which, among other
things, proposed to amend the definition of ``issue price.''
Subsequently, the Treasury Department and the IRS withdrew Sec. 1.148-
1(f) of the 2013 Proposed Regulations regarding the definition of issue
price and published another notice of proposed rulemaking in the
Federal Register (80 FR 36301; REG-138526-14) on June 24, 2015, which
re-proposed a definition of issue price (the 2015 Proposed
Regulations). Comments were received and a public hearing was held on
October 28, 2015. After consideration of all of the public comments,
the Treasury Department and the IRS adopt the 2015 Proposed
Regulations, with revisions, by this Treasury decision (the Final
Regulations).
Summary of Comments and Explanation of Provisions
This section discusses the comments received from the public
regarding the 2015 Proposed Regulations. The comments are available for
public inspection at www.regulations.gov. This section also explains
revisions made in the Final Regulations.
1. Introduction
Under section 103, interest received by investors on eligible State
and local bonds is exempt from Federal income tax. As a result, tax-
exempt bonds tend to have lower interest rates than taxable
obligations. Section 148 generally limits investment of proceeds of
tax-exempt bonds to investment yields that are not materially higher
than the yield on the bond issue. Section 148 also generally requires
that excess investment earnings be paid to the Federal Government at
periodic intervals. For purposes of these arbitrage investment
restrictions, section 148(h) provides that yield on an issue is to be
determined on the basis of the issue price (within the meaning of
sections 1273 and 1274). The reason for using issue price (rather than
sales proceeds less the costs of issuance) to determine yield for
purposes of section 148(h) is to ensure that issuers bear the costs of
issuance, rather than recover these costs through arbitrage profits.
See H. Rep. No. 99-426, at 517 (1985). The report of the Committee on
Ways and Means states that the Committee believed that this requirement
would encourage issuers to scrutinize costs of issuance more closely
and would encourage better targeting of the federal subsidy associated
with tax-exempt bonds. Id., at 517-518. In general, the lower the issue
price for bonds bearing a stated interest rate, the higher the yield.
An issuer has an economic incentive to receive the highest price for
bonds and to pay the lowest yield. This aligns with the purpose of the
arbitrage restrictions, which is to minimize arbitrage investment
benefits and remove incentives to issue more tax-exempt bonds, and thus
to limit the federal revenue cost of the tax subsidy for tax-exempt
bonds.
The issue price definition under the Existing Regulations generally
follows the issue price definition used for computing original issue
discount on debt instruments under sections 1273 and 1274, with certain
modifications. The definition of issue price under the Existing
Regulations provides generally that the issue price of bonds that are
publicly offered is the first price at which a substantial amount of
the bonds is sold to the public. The Existing Regulations define a
substantial amount to mean ten percent. Further, the Existing
Regulations include a special rule that applies a reasonable
expectations standard (rather than a standard based on actual sales) to
determine, as of the sale date,\1\ the issue price for bonds for which
a bona fide public offering is made, based on reasonable expectations
regarding the initial offering price. The issue prices of bonds with
different payment and credit terms are determined separately. Tax-
exempt bond issues often include bonds with different payment and
credit terms that generally sell at different prices.
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\1\ Under Sec. 1.150-1(c)(6), the sale date of a bond is the
first day on which there is a binding contract in writing for the
sale or exchange of the bond. By comparison, under Sec. 1.150-1(b),
the issue date for a bond is the date on which the issuer receives
the purchase price in exchange for that bond, commonly referred to
as the closing date or settlement date.
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The special rule in the Existing Regulations that provides for the
determination of issue price as of the sale date based on reasonable
expectations about the initial public offering price aims, in part, to
provide certainty that the bonds will qualify as tax-exempt bonds and
meet State or local requirements for debt issuance. Generally, the sale
date is the date when the syndicate or sole underwriter in contractual
privity with the issuer signs the agreement to buy the bonds from the
issuer and when the terms of the bond issue are set. In the municipal
bond market, due largely to the serial maturity structure and, in many
cases, an inability to sell a substantial amount of each of the
different maturities of the bonds with different terms (for which issue
price must be determined separately) by the sale date, issuers may have
difficulties in establishing the issue price of all of the bonds
included within an issue by the sale date, unless a special rule is
available.
2. General Rule: Actual Sale of a Substantial Amount of Bonds
Consistent with section 148(h), the 2015 Proposed Regulations
proposed to retain the rule that issue price generally will be
determined under the rules of sections 1273 and 1274. The 2015 Proposed
Regulations also proposed a general rule similar to that in the
regulations under section 1273 that the issue price of bonds issued for
money is the first price at which a substantial amount of the bonds is
sold to the public. The 2015 Proposed Regulations proposed to retain
the rule in the Existing Regulations that ten percent is the measure of
a substantial amount. The 2015 Proposed Regulations also proposed to
retain the rule that the issue prices of bonds with different payment
and credit terms are determined separately.
Commenters recommended adding an express rule to address the
treatment of private placements (for example, bank loans), which in the
municipal bond industry typically do not involve underwriters.
Commenters also recommended clarifying that an issuer may use the
general rule to determine issue price even if the issuer had sought to
use the special rule based on the initial offering price to the public
discussed in section 3 of this preamble. The Treasury Department and
the IRS agree with these recommendations.
The Final Regulations retain the rules in the Existing Regulations
and the general rule of the 2015 Proposed Regulations that, for bonds
issued for money, the issue price is the first price at which a
substantial amount of the bonds is sold to the public, and a
substantial amount is ten percent. In addition, in response to
comments, the Final Regulations expressly provide that, for a bond
issued for money in a private placement to a single buyer that is not
an underwriter or a related party (as defined in Sec. 1.150-1(b)) to
an underwriter, the issue price of the bond is the price paid by that
buyer. Further, the Final Regulations clarify that for bonds for which
more than one rule for determining issue price is available, for
example, the general rule and one of the special rules discussed in
sections 3 and 4 of this preamble, an issuer may select the rule it
will use to determine the issue price for the bonds at any time on or
before the issue date of the bonds. On or before the issue date of the
bonds, the issuer must identify the rule selected in its books and
records maintained for the bonds.
[[Page 89001]]
A commenter suggested that a specific time on the sale date should
be established as the proper time for determining issue price. The
Treasury Department and the IRS understand that it has been a
longstanding practice to determine issue price on the sale date without
regard to a specific time and that it is unlikely for bonds to be sold
to the public at different prices on that date. Thus, the imposition of
a specific time deadline for such determination seems unnecessary and
would add to the administrative burden. The Final Regulations do not
adopt this comment.
3. Special Rule for Use of the Initial Offering Price to the Public
The 2015 Proposed Regulations proposed a special rule that would
allow an issuer to treat the initial offering price to the public as
the issue price as of the sale date, provided certain requirements were
met. That proposed special rule (referred to as the ``alternative
method'' in the 2015 Proposed Regulations) proposed to require that the
lead underwriter (or sole underwriter, if applicable) certify certain
matters, including that no underwriter would sell bonds after the sale
date and before the issue date at a price higher than the initial
offering price except if the higher price was the result of a market
change for the bonds after the sale date (for example, due to a change
in market interest rates), and that the lead underwriter provide the
issuer with supporting documentation for the matters covered by the
certifications, including a justification for any higher price based on
a market change. (This proposed requirement for underwriters generally
to hold the price at no higher than the initial offering price to the
public until the issue date is sometimes referred to herein as the
``hold-the-offering-price'' requirement.)
Commenters favored a special rule to allow use of the initial
offering price to the public to set the issue price as of the sale
date. Numerous commenters, however, expressed concerns about various
aspects of the eligibility requirements for this proposed special rule.
One concern expressed by underwriters was that the requirement for the
lead underwriter to provide certification as to the actions of the
entire underwriting syndicate or selling group was overly broad.
Instead, underwriters recommended allowing members of an underwriting
syndicate or a selling group to agree individually to act in accordance
with the specific matters required under the special rule. The Final
Regulations adopt the comment that each underwriter is individually or
severally responsible for its agreement (rather than jointly
responsible with other underwriters).
Several commenters suggested that the hold-the-offering-price
requirement would result in lower offering prices and should not be
included in the special rule. One concern expressed related to the
differing time periods between the sale date and the issue date for
various issuers. One commenter recommended limiting the time period for
holding the price to six business days after the sale date. Further,
notwithstanding the potential flexibility in pricing afforded by the
proposed market change exception to the hold-the-offering-price
requirement, commenters overwhelmingly objected to this exception as
unworkable because of the absence of meaningful benchmarks for
municipal bond prices. Commenters also expressed concern that use of
this exception could lead to audit disputes over appropriate
documentation to support such price changes.
Accordingly, the Final Regulations adopt a modified hold-the-
offering-price requirement that requires underwriters to hold the price
for offering and selling unsold bonds at a price that is no greater
than the initial offering price to the public for a shorter time period
that ends on the earlier of (1) the close of the date that is the fifth
(5th) business day after the sale date or (2) the date on which the
underwriters have sold a substantial amount of the bonds to the public.
Further, in response to the overwhelming negative comments about the
proposed market change exception to the proposed hold-the-offering-
price requirement, the Final Regulations omit the market change
exception.
The modified hold-the-offering-price requirement in the Final
Regulations provides a standardized time period for application of the
requirement to bonds regardless of the differing time periods among
issuers between sales and closings of municipal bond issues. Further,
the shorter time period for this requirement should reduce potential
associated risks to underwriters and thereby limit the effects of this
requirement on initial pricing to issuers and, at the same time, ensure
that market pricing behavior is consistent with the initial offering
price used for issue price determinations.
Two commenters suggested confirming that, for purposes of the hold-
the-offering-price requirement, an underwriter may sell bonds to anyone
at a price that is lower (rather than higher) than the initial offering
price to the public under this special rule. This special rule
expressly provides for this result under the Final Regulations. One
commenter sought clarification that underwriters may sell bonds to
other underwriters at prices that are higher than the initial offering
price to the public under this special rule. Sales to underwriters at
such higher prices are inconsistent with a purpose of this special rule
to use the initial offering price to the public as a proxy for the
issuer's agreement with the underwriters about the maximum amount of
underwriters' compensation that is reflected in setting the issue
price. Thus, the Final Regulations clarify that underwriters may not
sell the bonds at a price that is higher than the initial offering
price to the public.
Several commenters recommended a different special rule that would
base determinations of issue price on sales of an aggregate percentage
of all of the bonds included within an issue, as distinguished from the
bond-by-bond method required to determine issue price for bonds with
different interest rates, maturities, credits, or payment terms under
the Existing Regulations and the 2015 Proposed Regulations. Commenters
recommended different percentages of sales of aggregate principal
amounts of bonds within an issue to determine issue price, including 25
percent, 50 percent, and 65 percent.
Although a rule that would focus on actual sales of greater
percentages of the aggregate principal amounts of bonds included within
an issue to determine issue price has potential utility, the Treasury
Department and the IRS have concerns about the comparability of the
terms of unsold bonds with the terms of sold bonds, which would serve
as a proxy for setting the issue price of the unsold bonds, and about
the attendant potential complexity to ensure appropriate comparability.
Further, the Treasury Department and the IRS have concerns about
selection of an appropriate percentage of aggregate sales for such a
rule and whether issuers would be able to sell the required percentage
of the aggregate principal amount of bonds within the issue. The public
comments did not reflect any consensus on an appropriate percentage of
aggregate sales for such a rule. In addition, several of the comments
in favor of such a rule focused particularly on the need for a more
workable rule for competitive sales. In response to this concern, the
Final Regulations provide a simplified special rule for competitive
sales, as described in section 4 of this preamble. Accordingly, the
Final Regulations do not adopt a rule that would focus on actual sales
of greater percentages of the aggregate principal amounts of bonds
included within an issue.
[[Page 89002]]
In summary, the Final Regulations provide a special rule under
which an issuer may treat the initial offering price to the public as
the issue price of the bonds as of the sale date if: (1) The
underwriters offered the bonds to the public at a specified initial
offering price on or before the sale date, and the lead underwriter in
the underwriting syndicate or selling group (or, if applicable, the
sole underwriter) provides, on or before the issue date, a
certification to that effect to the issuer, together with reasonable
supporting documentation for that certification, such as a copy of the
pricing wire or equivalent communication; and (2) each underwriter
agrees in writing that it will neither offer nor sell the bonds to any
person at a price that is higher than the initial offering price during
the period starting on the sale date and ending on the earlier of the
close of the fifth (5th) business day after the sale date, or the date
on which the underwriters have sold a substantial amount of the bonds
to the public at a price that is no higher than the initial offering
price to the public.
4. Special Rule for Competitive Sales
Numerous commenters, including four States, strongly urged a
streamlined special rule for competitive sales to allow the reasonably
expected initial offering price to the public reflected in the winning
bid in a competitive sale to establish the issue price without a hold-
the-offering-price requirement or other restrictions. Commenters
suggested that the public bidding process for pricing municipal bonds
in competitive sales itself provides a sufficient basis to achieve the
best pricing for issuers. The Treasury Department and the IRS recognize
that competitive sales favor competition and price transparency that
may result in better pricing for issuers. The Final Regulations adopt
these comments and provide that, for bonds issued for money pursuant to
an eligible competitive sale, an issuer may treat the reasonably
expected initial offering price to the public of the bonds as the issue
price of the bonds as of the sale date if the issuer obtains a
certification from the winning bidder regarding the reasonably expected
initial offering price to the public of the bonds upon which the price
in the winning bid is based.
For purposes of this special rule, the Final Regulations define
competitive sale to mean a sale of bonds by an issuer to an underwriter
that is the winning bidder in a bidding process in which the issuer
offers the bonds for sale to underwriters at specified written terms
and that meets the following requirements: (1) The issuer disseminates
the notice of sale to potential underwriters in a manner reasonably
designed to reach potential underwriters; (2) all bidders have an equal
opportunity to bid; (3) the issuer receives bids from at least three
underwriters of municipal bonds who have established industry
reputations for underwriting new issuances of municipal bonds; and (4)
the issuer awards the sale to the bidder who offers the highest price
(or lowest interest cost).
5. Definitions
The 2015 Proposed Regulations proposed to define the term
``public'' for purposes of determining the issue price of tax-exempt
bonds to mean any person other than an underwriter or a related party
to an underwriter. Several commenters recommended expanding the
definition of public to include related parties to underwriters. This
recommended change would allow various affiliates of underwriters, such
as entities involved in proprietary trading, to qualify as members of
the public for purposes of determining issue price. The Final
Regulations do not adopt this comment. The Final Regulations retain
this related party restriction on the definition of the public as a
safeguard to protect against potential abuse.
The 2015 Proposed Regulations proposed to define ``underwriter'' to
include: (1) Any person that contractually agrees to participate in the
initial sale of the bonds to the public by entering into a contract
with the issuer or into a contract with a lead underwriter to form an
underwriting syndicate and (2) any person that, on or before the sale
date, directly or indirectly enters into a contract or other
arrangement with any of the foregoing to sell the bonds. Numerous
commenters expressed significant concern that the phrase ``other
arrangement'' in the definition of underwriter was vague and
unworkable. One commenter asked if distribution arrangements (for
example, a retail distribution contract between a member of an
underwriting syndicate or selling group and another dealer that is not
in the syndicate or selling group) were included. Another commenter
suggested changes to clarify that a contract to sell the bonds be
limited to a contract with respect to the initial sale of the bonds to
the public. In response to these comments, the Final Regulations omit
the phrase ``or other arrangement'' from the definition of underwriter.
The Final Regulations also clarify that covered agreements must relate
to the initial sale of the bonds to the public and that these
agreements include retail distribution agreements.
6. Standard for Reliance on Certifications and Consequences of
Violations
The 2015 Proposed Regulations proposed a standard that would limit
an issuer's ability to rely on certifications from underwriters to
circumstances in which an issuer did not know or have reason to know,
after exercising due diligence, that the certifications were false.
Several commenters expressed concerns about this proposed standard for
reliance on certifications. One commenter expressed particular concern
that the proposed standard appeared to be higher than or different from
the general due diligence standard for determining reasonable
expectations that bonds are not arbitrage bonds under Sec. 1.148-2(b)
of the Existing Regulations. The existing definition of reasonable
expectations, found in Sec. 1.148-1(b) of the Existing Regulations,
treats an issuer's expectations or actions as reasonable only if a
prudent person in the same circumstances as the issuer would have those
same expectations or take those same actions, based on all the
objective facts and circumstances. One commenter also sought
confirmation that issuers could rely on certifications from
underwriters without independent verification.
In response to the comments, the Final Regulations omit the
proposed special standard for reliance on underwriters' certifications.
Instead, the existing due diligence standard under the Existing
Regulations for reasonable expectations or reasonableness will apply to
any certification under the Final Regulations. For example, this
existing due diligence standard will apply under the special rule on
competitive sales to an issuer's reliance on a certification from the
winning bidder regarding the reasonably expected initial offering price
to the public of the bonds upon which the price in the winning bid is
based.
Several commenters urged providing conclusive legal certainty for
issue price determinations as of the sale date based on receipt of
required underwriter certifications without regard to whether such
certifications subsequently proved to be false. Although the Final
Regulations generally will allow issuers to establish the issue price
as of the sale date, the Final Regulations do not adopt this comment.
Accordingly, a failure to meet a specific eligibility requirement of a
rule for determining issue price, such as an underwriter's breach of
its hold-the-offering-price agreement under the special rule for use of
initial offering
[[Page 89003]]
price, will result in a failure to establish issue price under that
rule and a redetermination of issue price under a different rule. The
potential invalidation of an issue price determination is important to
ensure compliance with the arbitrage restrictions and the legal
availability of penalties against underwriters for false statements. A
false statement by an underwriter in a certification or in the
agreement among underwriters under one of these special rules may
result in a penalty against the underwriter under section 6700,
depending on the facts and circumstances.
In accordance with section 6001, the issuer must maintain
reasonable documentation in its books and records to support its issue
price determinations. In addition, the Final Regulations require that
the issuer obtain from the underwriter certain certifications and other
reasonable supporting documentation such as a pricing wire to establish
its issue price determination under a specific rule in the Final
Regulations. A certification from the underwriter of the first price at
which ten percent of the bonds were sold to the public is an example of
reasonable supporting documentation to establish the issue price of the
bonds under the general rule in the Final Regulations.
7. Other Comments
A commenter requested a special rule under section 148 to determine
issue price in a debt-for-debt exchange, including an exchange
resulting from a significant modification under Sec. 1.1001-3. Under
the special rule, an issuer would have the option to use a tax-exempt
bond's stated principal amount as the issue price rather than the issue
price that otherwise would apply under section 1273 or 1274. The
commenter requested the rule because, in the commenter's experience,
the stated interest rate on a tax-exempt bond issued in a debt-for-debt
exchange was generally less than the adjusted applicable Federal rate
(AAFR) used under section 1288 to determine whether the bond has
adequate stated interest for purposes of section 1274. In this
situation, the issue price of the bond would be less than the bond's
stated principal amount, resulting in an arbitrage yield that is higher
than it otherwise would be if the bond were treated as issued for an
amount equal to the bond's stated principal amount. The Final
Regulations do not include such a rule because, since the date of the
commenter's request, the method to determine the AAFR has been modified
in TD 9763, 81 FR 24482 (April 26, 2016). As a result of this
modification, it is more likely that the issue price of a tax-exempt
bond issued in a debt-for-debt exchange will be the bond's stated
principal amount under section 1273 or 1274 (for example, because the
AAFR will not be greater than the corresponding applicable Federal rate
for taxable bonds, as it was in certain years before the modification).
In addition, some commenters recommended allowing the use of issue
price as defined for arbitrage purposes in applying various limitations
for other tax-exempt bond purposes, such as those based on principal
amounts, face amounts, and sale proceeds. The Final Regulations do not
adopt this recommendation because it raises issues that are beyond the
scope of the 2015 Proposed Regulations, and the recommended extension
of the application of the definition of issue price beyond arbitrage
purposes appropriately warrants a separate opportunity for public
comment. The Treasury Department and the IRS, however, expect to
consider this recommendation in connection with future guidance.
Applicability Date
The Final Regulations apply to bonds that are sold on or after June
7, 2017.
Special Analyses
Certain IRS regulations, including these Final Regulations, are
exempt from the requirements of Executive Order 12866, as supplemented
by Executive Order 13563. Therefore, a regulatory impact assessment is
not required.
It is hereby certified that these Final Regulations will not have a
significant economic impact on a substantial number of small entities.
This certification is based generally on the fact that any effect on
small entities by these rules generally flows from section 148 of the
Code. Section 148(h) of the Code requires the yield on an issue of
bonds to be determined on the basis of issue price (within the meaning
of sections 1273 and 1274). Under section 1273(b), the issue price is
the first price at which a substantial amount of the bonds is sold to
the public. Section 1.148-1(f)(2) of the Final Regulations gives effect
to the statute by requiring the issuer to (1) obtain certain
documentation from the underwriter, which is the party that sells the
bonds to the public, to support the issuer's determination of issue
price and (2) indicate in its books and records the rule used by the
issuer to determine issue price. This information will be used to
support the issue price of the bonds for audit and other purposes. Any
economic impact of obtaining this information is minimal because most
of the information already is provided to issuers by the underwriters
under existing industry practices. Accordingly, these changes do not
add to the impact on small entities imposed by the statutory provision.
Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code, the 2015 Proposed
Regulations preceding these Final Regulations were submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business, and no comments were received.
Drafting Information
The principal authors of these regulations are Johanna Som de Cerff
and Lewis Bell, Office of Associate Chief Counsel (Financial
Institutions and Products), IRS. However, other personnel from the
Treasury Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.148-0(c) is amended by adding entries for Sec. Sec.
1.148-1(f) and 1.148-11(m) to read as follows:
Sec. 1.148-0 Scope and table of contents.
* * * * *
(c) * * *
Sec. 1.148-1 Definitions and elections.
* * * * *
(f) Definition of issue price.
(1) In general.
(2) Bonds issued for money.
(3) Definitions.
(4) Other special rules.
* * * * *
Sec. 1.148-11 Effective/applicability dates.
* * * * *
(m) Definition of issue price.
0
Par. 3. Section 1.148-1 is amended by revising the definition of
``Issue price'' in paragraph (b) and adding paragraph (f) to read as
follows:
[[Page 89004]]
Sec. 1.148-1 Definitions and elections.
* * * * *
(b) * * *
Issue price means issue price as defined in paragraph (f) of this
section.
* * * * *
(f) Definition of issue price--(1) In general. Except as otherwise
provided in this paragraph (f), ``issue price'' is defined in sections
1273 and 1274 and the regulations under those sections.
(2) Bonds issued for money--(i) General rule. Except as otherwise
provided in this paragraph (f)(2), the issue price of bonds issued for
money is the first price at which a substantial amount of the bonds is
sold to the public. If a bond is issued for money in a private
placement to a single buyer that is not an underwriter or a related
party (as defined in Sec. 1.150-1(b)) to an underwriter, the issue
price of the bond is the price paid by that buyer. Issue price is not
reduced by any issuance costs (as defined in Sec. 1.150-1(b)).
(ii) Special rule for use of initial offering price to the public.
The issuer may treat the initial offering price to the public as of the
sale date as the issue price of the bonds if the requirements of
paragraphs (f)(2)(ii)(A) and (B) of this section are met.
(A) The underwriters offered the bonds to the public for purchase
at a specified initial offering price on or before the sale date, and
the lead underwriter in the underwriting syndicate or selling group
(or, if applicable, the sole underwriter) provides, on or before the
issue date, a certification to that effect to the issuer, together with
reasonable supporting documentation for that certification, such as a
copy of the pricing wire or equivalent communication.
(B) Each underwriter agrees in writing that it will neither offer
nor sell the bonds to any person at a price that is higher than the
initial offering price to the public during the period starting on the
sale date and ending on the earlier of the following:
(1) The close of the fifth (5th) business day after the sale date;
or
(2) The date on which the underwriters have sold a substantial
amount of the bonds to the public at a price that is no higher than the
initial offering price to the public.
(iii) Special rule for competitive sales. For bonds issued for
money in a competitive sale, an issuer may treat the reasonably
expected initial offering price to the public as of the sale date as
the issue price of the bonds if the issuer obtains from the winning
bidder a certification of the bonds' reasonably expected initial
offering price to the public as of the sale date upon which the price
in the winning bid is based.
(iv) Choice of rule for determining issue price. If more than one
rule for determining the issue price of the bonds is available under
this paragraph (f)(2), at any time on or before the issue date, the
issuer may select the rule it will use to determine the issue price of
the bonds. On or before the issue date of the bonds, the issuer must
identify the rule selected in its books and records maintained for the
bonds.
(3) Definitions. For purposes of this paragraph (f), the following
definitions apply:
(i) Competitive sale means a sale of bonds by an issuer to an
underwriter that is the winning bidder in a bidding process in which
the issuer offers the bonds for sale to underwriters at specified
written terms, if that process meets the following requirements:
(A) The issuer disseminates the notice of sale to potential
underwriters in a manner that is reasonably designed to reach potential
underwriters (for example, through electronic communication that is
widely circulated to potential underwriters by a recognized publisher
of municipal bond offering documents or by posting on an Internet-based
Web site or other electronic medium that is regularly used for such
purpose and is widely available to potential underwriters);
(B) All bidders have an equal opportunity to bid (within the
meaning of Sec. 1.148-5(d)(6)(iii)(A)(6));
(C) The issuer receives bids from at least three underwriters of
municipal bonds who have established industry reputations for
underwriting new issuances of municipal bonds; and
(D) The issuer awards the sale to the bidder who submits a firm
offer to purchase the bonds at the highest price (or lowest interest
cost).
(ii) Public means any person (as defined in section 7701(a)(1))
other than an underwriter or a related party (as defined in Sec.
1.150-1(b)) to an underwriter.
(iii) Underwriter means:
(A) Any person (as defined in section 7701(a)(1)) that agrees
pursuant to a written contract with the issuer (or with the lead
underwriter to form an underwriting syndicate) to participate in the
initial sale of the bonds to the public; and
(B) Any person that agrees pursuant to a written contract directly
or indirectly with a person described in paragraph (f)(3)(iii)(A) of
this section to participate in the initial sale of the bonds to the
public (for example, a retail distribution agreement between a national
lead underwriter and a regional firm under which the regional firm
participates in the initial sale of the bonds to the public).
(4) Other special rules. For purposes of this paragraph (f), the
following special rules apply:
(i) Separate determinations. The issue price of bonds in an issue
that do not have the same credit and payment terms is determined
separately. The issuer need not apply the same rule to determine issue
price for all of the bonds in the issue.
(ii) Substantial amount. Ten percent is a substantial amount.
(iii) Bonds issued for property. If a bond is issued for property,
the adjusted applicable Federal rate, as determined under section 1288
and Sec. 1.1288-1, is used in lieu of the applicable Federal rate to
determine the bond's issue price under section 1274.
0
Par. 4. Section 1.148-11 is amended by adding paragraph (m) to read as
follows:
Sec. 1.148-11 Effective/applicability dates.
* * * * *
(m) Definition of issue price. The definition of issue price in
Sec. 1.148-1(b) and (f) applies to bonds that are sold on or after
June 7, 2017.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: November 22, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury for Tax Policy.
[FR Doc. 2016-29486 Filed 12-8-16; 8:45 am]
BILLING CODE 4830-01-P