[Federal Register Volume 83, Number 249 (Monday, December 31, 2018)]
[Proposed Rules]
[Pages 67701-67705]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28370]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-141739-08]
RIN 1545-BI22
Reissuance of State or Local Bonds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that address when
tax-exempt bonds are treated as retired for purposes of section 103 and
sections 141 through 150 of the Internal Revenue Code (Code). The
proposed regulations are necessary to unify and to clarify existing
guidance on this subject. The proposed regulations affect State and
local governments that issue tax-exempt bonds.
DATES: Comments and requests for a public hearing must be received by
March 1, 2019.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-141739-08), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
141739-08), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20224, or sent electronically via the Federal
eRulemaking Portal at www.regulations.gov (REG-141739-08).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Spence Hanemann, (202) 317-6980; concerning submissions of comments and
requesting a hearing, Regina Johnson, (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to 26 CFR part 1 under
sections 150 and 1001 of the Code (Proposed Regulations).
1. In General
In general, under section 103, interest received by the holders of
certain bonds issued by State and local governments is
[[Page 67702]]
exempt from Federal income tax. To qualify for the tax exemption, a
bond issued by a State or local government must satisfy various
eligibility requirements under sections 141 through 150 at the time of
issuance of the bond. If 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
sections 103 and 141 through 150. The reissuance of an issue of tax-
exempt bonds may result in various negative consequences to the issuer,
such as changes in yield for purposes of the arbitrage investment yield
restrictions under section 148(a), acceleration of arbitrage rebate
payment obligations under section 148(f), and change-in-law risk.
2. Tender Option Bonds
Tender option bonds and variable rate demand bonds (collectively,
tender option bonds) have special features that present reissuance
questions. Specifically, tender option bonds have original terms that
provide for a tender option interest rate mode, as described in this
paragraph. Issuers of tax-exempt bonds often preauthorize several
different interest rate modes in the bond documents and retain an
option to switch interest rate modes under parameters set forth in the
bond documents. During a tender option mode, tender option bonds have
short-term interest rates that are reset periodically at various short-
term intervals (typically, every seven days) based on the current
market rate necessary to remarket the bonds at par. In connection with
each resetting of the interest rate, the holder of a tender option bond
has a right or requirement to tender the bond back to the issuer or its
agent for purchase at par. Tender option bonds also may have interest
rate mode conversion options that permit the issuer or conduit borrower
to change the interest rate mode on the bonds from a tender option mode
to another short-term interest rate mode or to a fixed interest rate to
maturity. At the time of a conversion to another interest rate mode,
the holder of a tender option bond typically has the right or
requirement to tender the bond for purchase at par.
Tender option bonds generally have third-party liquidity facilities
from banks or other liquidity providers to ensure that there is
sufficient cash to repurchase the bonds upon a holder's tender, and
they also commonly have credit enhancement from bond insurers or other
third-party guarantors. Upon a holder's exercise of its tender rights
in connection with either a resetting of the interest rate during a
tender option mode or a conversion to another interest rate mode, a
remarketing agent or a liquidity provider typically will acquire the
bonds subject to the tender and resell the bonds either to the same
bondholders or to others willing to purchase such bonds.
3. Existing Guidance
To address reissuance questions related to tax-exempt bonds, on
December 27, 1988, the IRS published Notice 88-130, 1988-2 CB 543,
which provides rules for determining when a tax-exempt bond is retired
for purposes of sections 103 and 141 through 150. Notice 88-130
provides in part that a tax-exempt bond is retired when there is a
change to the terms of the bond that results in a disposition of the
bond for purposes of section 1001. In addition, Notice 88-130 provides
special rules for retirement of certain tender option bonds that meet a
definition of the term ``qualified tender bond.''
On June 26, 1996, the Department of the Treasury (Treasury
Department) and the IRS published final regulations under Sec. 1.1001-
3 (1996 Final Regulations) in the Federal Register (61 FR 32926). These
regulations provide rules for determining whether a modification of the
terms of a debt instrument, including a tax-exempt bond, results in an
exchange for purposes of section 1001. In recognition of a need to
coordinate the interaction of the prior guidance in Notice 88-130 with
the subsequent final regulations under Sec. 1.1001-3 for particular
tax-exempt bond purposes, the Treasury Department and the IRS stated
their intention to issue regulations under section 150 on this subject
in the Federal Register (61 FR 32930).
On April 14, 2008, the IRS published Notice 2008-41, 2008-1 CB 742.
Like Notice 88-130, Notice 2008-41 provides rules for determining when
a tax-exempt bond is retired for purposes of sections 103 and 141
through 150 and includes special rules for qualified tender bonds.
While the retirement standards provided in these two notices are
similar, Notice 2008-41 was intended to coordinate the retirement
standards for tax-exempt bond purposes with the 1996 Final Regulations
on modifications of debt instruments under Sec. 1.1001-3 and to be
more administrable than Notice 88-130. In order to preserve flexibility
and to limit potential unintended consequences during the 2008
financial crisis, Notice 2008-41 permitted issuers to apply either
notice. Generally, under Notice 2008-41, a tax-exempt bond is retired
when a significant modification to the terms of the bond occurs under
Sec. 1.1001-3, the bond is acquired by or on behalf of its issuer, or
the bond is otherwise redeemed or retired. The notice 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. Although these general rules apply to
a qualified tender bond, Notice 2008-41 also provides that certain
features of qualified tender bonds will not result in a retirement. In
Notice 2008-41, the Treasury Department and the IRS reiterated their
intention to provide guidance on the retirement of tax-exempt bonds in
regulations under section 150.
The Proposed Regulations provide rules for determining when tax-
exempt bonds are treated as retired for purposes of sections 103 and
141 through 150. The Proposed Regulations also amend Sec. 1.1001-
3(a)(2) to conform that section to the special rules in the Proposed
Regulations for retirement of qualified tender bonds.
Explanation of Provisions
1. Section 1.150-3: Retirement of Tax-Exempt Bonds
A. General Rules for Retirement of a Tax-Exempt Bond
The Proposed Regulations generally provide retirement standards
that apply to tax-exempt bonds for purposes of sections 103 and 141
through 150. These retirement standards follow the guidance in Notice
2008-41 with technical refinements. The Proposed Regulations provide
that a tax-exempt bond is retired if a significant modification to the
terms of the bond occurs under Sec. 1.1001-3, if the issuer or an
agent acting on its behalf acquires the bond in a manner that
liquidates or extinguishes the bondholder's investment in the bond, or
if the bond
[[Page 67703]]
is otherwise redeemed (for example, redeemed at maturity).
For this purpose, the Proposed Regulations define the term
``issuer'' to mean the State or local governmental unit that actually
issues the bonds and any related party (as defined in Sec. 1.150-1(b))
to that actual issuer. In the case of a governmental unit, the
applicable related party definition under Sec. 1.150-1(b) applies a
controlled group test under Sec. 1.150-1(e) to determine related party
status, based generally on all of the facts and circumstances. This
controlled group test includes special rules which specifically treat
control over the governing board of a governmental unit and control
over use of funds or assets of a governmental unit as giving rise to
controlled group status.
By focusing on the actual issuer rather than on a conduit borrower,
this definition of issuer maintains and respects the essential legal
construct necessary for issuance of many tax-exempt bonds, such as
qualified private activity bonds under section 141(e), that the actual
issuer be treated as the obligor in conduit financings. Thus, under the
Proposed Regulations, the acquisition of a tax-exempt bond by a conduit
borrower that is not a related party to the actual issuer does not
result in the retirement of that bond.
The Proposed Regulations also prescribe certain consequences for a
bond that is retired pursuant to a deemed exchange under Sec. 1.1001-3
or following the acquisition of the bond by the issuer or the issuer's
agent. In the former case, the bond is treated as a new bond issued at
the time of the modification as determined under Sec. 1.1001-3. In the
latter case, if the issuer resells the bond, the bond is treated as a
new bond issued at the time of resale. If the issuer does not resell
the acquired bond, the acquired bond is simply retired. In either case
in which a retired bond is treated as a newly issued bond, the issuer
must consider whether the new bond refunds the retired bond. For this
purpose, the rules regarding the definition of a refunding issue under
Sec. 1.150-1(d) apply. For example, if the issuer of the bond retired
pursuant to Sec. 1.1001-3 is the same as the issuer (or a related
party to the issuer) of the newly issued bond, the newly issued bond
will be part of a current refunding issue that refunds the retired
bond.
B. Exceptions to Retirement of a Tax-Exempt Bond
The Proposed Regulations provide three exceptions that limit
retirements resulting from the operation of the general rules. Two of
these exceptions are intended to prevent the special features of tender
option bonds from resulting in a retirement. A third exception applies
to all tax-exempt bonds.
The first two exceptions in the Proposed Regulations apply to
qualified tender bonds, a defined term that is essentially a tender
option bond meeting certain requirements. Specifically, a qualified
tender bond is a tax-exempt bond that, pursuant to the terms of its
governing contract, bears interest during each interest rate mode at a
fixed rate, a qualified floating rate under Sec. 1.1275-5, or an
objective rate that is permitted for a tax-exempt bond under Sec.
1.1275-5(c)(5). Furthermore, interest on a qualified tender bond must
be unconditionally payable at periodic intervals of no more than a
year. Finally, a qualified tender bond may not have a stated maturity
date later than 40 years after its issue date and must include a
qualified tender right. This definition is similar to the definition of
qualified tender bond provided in Notice 2008-41.
The Proposed Regulations define a qualified tender right required
for a qualified tender bond in terms of the mechanics by which the
tender right operates. The Proposed Regulations define a qualified
tender right to include either a tender right that arises periodically
during a tender option mode or a tender right that arises upon the
exercise of the issuer's option under the original terms of the bond to
change the interest rate mode.
A qualified tender bond has two features that otherwise could
result in retirement of the bond under the general rules for retirement
in the Proposed Regulations. First, when accompanied by a qualified
tender right, an exercise of the issuer's option to change the interest
rate mode might, in some circumstances, qualify as a modification under
the rule in Sec. 1.1001-3(c)(2)(iii) for alterations that result from
the exercise of an option. Thus, absent the exception in the Proposed
Regulations, a qualified tender right might result in a modification
that, if significant, would cause the qualified tender bond to be
retired. To address this circumstance, the Proposed Regulations provide
an exception that avoids retirement by disregarding a qualified tender
right for purposes of determining whether a significant modification of
a qualified tender bond under Sec. 1.1001-3 results in retirement of
the bond. Consequently, the issuer's option to change the interest rate
mode typically would qualify as a unilateral option and the change of
interest rate mode resulting from exercise of that option would not be
a modification of the qualified tender bond.
The second feature of a qualified tender bond that could result in
retirement of the bond under the general rules for retirement in the
Proposed Regulations is the financing structure feature that may
require the issuer or its agent to acquire the bond upon exercise of
the qualified tender right. To address this circumstance, the Proposed
Regulations provide another exception under which an acquisition of a
qualified tender bond pursuant to the exercise of a qualified tender
right will not result in retirement, provided that neither the issuer
nor its agent holds the bond for longer than 90 days. This 90-day
period is intended to provide the issuer or its remarketing agent with
sufficient time to resell a tendered bond to a new holder.
The Proposed Regulations also provide an exception to the general
rules of retirement for all tax-exempt bonds. This exception, carried
forward from Notice 2008-41, provides that acquisition of a tax-exempt
bond by a guarantor or liquidity facility provider acting as the
issuer's agent does not result in retirement of the bond if the
acquisition is pursuant to the terms of the guarantee or liquidity
facility and the guarantor or liquidity facility provider is not a
related party (as defined in Sec. 1.150-1(b)) to the issuer.
2. Applicability Dates
The rules in Sec. 1.150-3 of the Proposed Regulations are proposed
to apply to events and actions taken with respect to bonds that occur
on or after the date that is 90 days after the date of publication of
the Treasury decision adopting these rules as final regulations in the
Federal Register. Issuers may apply these regulations to events and
actions taken with respect to bonds that occur before that date. The
Treasury Department and the IRS expect that the final regulations will
obsolete Notice 88-130 and Notice 2008-41.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations. Because
these regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for
[[Page 67704]]
Advocacy of the Small Business Administration for comment on its impact
on small entities.
Comments and Requests for Public Hearing
Before the Proposed Regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
The Treasury Department and the IRS request comments on all aspects of
the proposed rules. All comments will be available at
www.regulations.gov or upon request. A public hearing will be scheduled
if requested in writing by any person that timely submits written
comments. If a public hearing is scheduled, notice of the date, time,
and place for the hearing will be published in the Federal Register.
Drafting Information
The principal authors of these regulations are Spence Hanemann of
the Office of Associate Chief Counsel (Financial Institutions and
Products) and Vicky Tsilas, formerly of the Office of Associate Chief
Counsel (Financial Institutions and Products). However, other personnel
from the Treasury Department and the IRS participated in their
development.
Availability of IRS Documents
The IRS notices cited in this preamble are published in the
Internal Revenue Bulletin (or Cumulative Bulletin) and are available
from the Superintendent of Documents, U.S. Government Publishing
Office, Washington, DC 20402, or by visiting the IRS website at
www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be 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 1.150-3 is added to read as follows:
Sec. 1.150-3 Retirement standards for state and local bonds.
(a) General purpose and scope. This section provides rules to
determine when a tax-exempt bond is retired for purposes of sections
103 and 141 through 150.
(b) General rules for retirement of a tax-exempt bond. Except as
otherwise provided in paragraph (c) of this section, a tax-exempt bond
is retired when:
(1) A significant modification of the bond occurs under Sec.
1.1001-3;
(2) The issuer or its agent acquires the bond in a manner that
liquidates or extinguishes the bondholder's investment in the bond; or
(3) The bond is otherwise redeemed (for example, redeemed at
maturity).
(c) Exceptions to retirement of a tax-exempt bond--(1) Qualified
tender right does not result in a modification. In applying Sec.
1.1001-3 to a qualified tender bond for purposes of paragraph (b)(1) of
this section, both the existence and exercise of a qualified tender
right are disregarded. Thus, a change in the interest rate mode made in
connection with the exercise of a qualified tender right generally is
not a modification because the change occurs by operation of the terms
of the bond and the holder's resulting right to put the bond to the
issuer or its agent does not prevent the issuer's option from being a
unilateral option.
(2) Acquisition pursuant to a qualified tender right. Acquisition
of a qualified tender bond by the issuer or its agent does not result
in retirement of the bond under paragraph (b)(2) of this section if the
acquisition is pursuant to the operation of a qualified tender right
and neither the issuer nor its agent continues to hold the bond after
the close of the 90-day period beginning on the date of the tender.
(3) Acquisition of a tax-exempt bond by a guarantor or liquidity
facility provider. Acquisition of a tax-exempt bond by a guarantor or
liquidity facility provider acting on the issuer's behalf does not
result in retirement of the bond under paragraph (b)(2) of this section
if the acquisition is pursuant to the terms of the guarantee or
liquidity facility and the guarantor or liquidity facility provider is
not a related party (as defined in Sec. 1.150-1(b)) to the issuer.
(d) Effect of retirement. If a bond is retired pursuant to
paragraph (b)(1) of this section (that is, in a transaction treated as
an exchange of the bond for a bond with modified terms), the bond is
treated as a new bond issued at the time of the modification as
determined under Sec. 1.1001-3. If the issuer or its agent resells a
bond retired pursuant to paragraph (b)(2) of this section, the bond is
treated as a new bond issued on the date of resale. In both cases, the
rules of Sec. 1.150-1(d) apply to determine if the new bond is part of
a refunding issue.
(e) Definitions. For purposes of this section, the following
definitions apply:
(1) Issuer means the State or local governmental unit (as defined
in Sec. 1.103-1) that actually issues the tax-exempt bond and any
related party (as defined in Sec. 1.150-1(b)) to the actual issuer (as
distinguished, for example, from a conduit borrower that is not a
related party to the actual issuer).
(2) Qualified tender bond means a tax-exempt bond that, pursuant to
the terms of its governing contract, has all of the features described
in this paragraph (e)(2). During each authorized interest rate mode,
the bond bears interest at a fixed interest rate, a qualified floating
rate under Sec. 1.1275-5(b), or an objective rate for a tax-exempt
bond under Sec. 1.1275-5(c)(5). Interest on the bond is
unconditionally payable at periodic intervals of no more than one year.
The bond has a stated maturity date that is not later than 40 years
after the issue date of the bond. The bond includes a qualified tender
right.
(3) Qualified tender right means a right or obligation of a holder
of the bond to tender the bond for purchase as described in this
paragraph (e)(3). The purchaser under the tender may be the issuer, its
agent, or another party. The tender right is available on at least one
date before the stated maturity date. For each such tender, the
purchase price of the bond is equal to par (plus any accrued interest).
Following each such tender, the issuer or its remarketing agent either
redeems the bond or uses reasonable best efforts to resell the bond
within the 90-day period beginning on the date of the tender. Upon any
such resale, the purchase price of the bond is equal to par (plus any
accrued interest).
(f) Applicability date. This section applies to events and actions
taken with respect to bonds that occur on or after the date that is 90
days after the date of publication of the Treasury decision adopting
these rules as final regulations in the Federal Register.
0
Par. 3. Section 1.1001-3 is amended by:
0
1. Revising paragraph (a)(2).
0
2. Revising the paragraph (h) subject heading.
0
3. Revising the first sentence of paragraph (h)(1).
0
4. Revising the paragraph (h)(2) subject heading.
0
5. Adding paragraph (h)(3).
The revisions and addition read as follows:
Sec. 1.1001-3 Modifications of debt instruments.
(a) * * *
(2) Qualified tender bonds. For special rules governing whether
tax-
[[Page 67705]]
exempt bonds that are qualified tender bonds are retired for purposes
of sections 103 and 141 through 150, see Sec. 1.150-3.
* * * * *
(h) Applicability date. * * *
(1) * * * Except as otherwise provided in paragraphs (h)(2) and (3)
of this section, this section applies to alterations of the terms of a
debt instrument on or after September 24, 1996. * * *
(2) Alteration or modification results in an instrument or property
right that is not debt. * * *
(3) Qualified tender bonds. Paragraph (a)(2) of this section
applies to events and actions taken with respect to qualified tender
bonds that occur on or after the date that is 90 days after the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-28370 Filed 12-28-18; 8:45 am]
BILLING CODE 4830-01-P