|
IRS Updates Recently Issued Interim Guidance on Reissuance Standards for State and Local Bonds
The IRS today released an advance copy of Notice 2008-41 which clarifies, amends, supplements, and supersedes Notice 2008-27 and provides interim guidance—until regulations are issued—to issuers of state and local bonds concerning when certain tax-exempt bonds are treated as reissued or retired for purposes of sections 103 and 141-150.
For an electronic version of today’s notice (21 pages):
Notice 2008-41
Background
In February 2008, the IRS issued Notice 2008-27 to provide greater certainty and flexibility to address federal tax issues that have arisen in the tax-exempt bond market as a result of recent rating agency downgrades of major municipal bond issuers and failures of auctions in the auction rate bond sector of the tax-exempt bond market. See
TaxNewsFlash-Exempt
Organizations 2008-13.
Notice 2008-27 provided interim guidance which issuers of tax-exempt bonds could rely on for any actions taken with respect to tax-exempt bonds on or after November 1, 2007, and before the effective date of the anticipated future regulations under section 150. The IRS stated that bond issuers could also continue to rely on Notice 88-130 until the effective date of the future regulations and that the guidance in today’s notice may be amended or supplemented “as circumstances warrant.”
|
Notice 2008-41
The IRS released Notice 2008-41 to provide “greater certainty and flexibility” concerning certain federal tax issues that have arisen in the tax-exempt market. Specifically, Notice 2008-41 provides the following changes to the guidance under Notice 2008-27.
Qualified Tender Bond Rules
Notice 2008-41:
- Clarifies that the determination of whether a bond is a “qualified tender bond” is generally applied on a bond-by-bond basis (except to the extent that such test requires a determination of the weighted average maturity of the entire issue).
- Adds qualified inflation rates and qualified inverse floating rates under Reg. section 1.1275-5(c) as eligible interest rates for qualified tender bonds.
- Clarifies how the 90-day remarketing requirement in the definition of a
qualified tender right operates but also provides a temporary 180-day
remarketing requirement.
New Temporary Rule Allowing Governmental Issuers to Purchase Their Own Auction Rate Bonds
Notice 2008-41 introduces a temporary rule which allows a governmental issuer to purchase its own tax-exempt auction rate bonds on a temporary basis without causing a retirement or extinguishment of the debt represented by the purchased tax-exempt bonds.
Certain Arbitrage Rules
Notice 2008-41:
- Adds several rules that address the consequences of certain actions for purposes of the arbitrage investment restrictions under section 148—including actions relating to qualified hedges, purchases of tax-exempt bonds by conduit borrowers, and sales of bonds at a market premium pursuant to a qualified interest rate mode change under today’s notice.
- Supplements the arbitrage rule on the treatment of minor modifications of qualified hedges from Notice 2008-27 with a rule which provides that a deemed termination of an otherwise qualified hedge under Reg. section 1.148-4(h) will not result from bonds being held by or on behalf of a governmental issuer during the 90-day permitted holding period or the temporary 180-day permitted holding period for remarketing pursuant to a qualified tender right or during the 180-day permitted holding period for temporary purchases of auction rate bonds.
- Adds a special rule with respect to a conduit borrower’s purchase of tax-exempt to provide that such a purchase will not cause a violation of a technical arbitrage restriction against purchases of tax-exempt bonds by conduit borrowers under the “program investment” definition in Reg. section 1.148-1(b) in certain circumstances.
- Provides that solely for arbitrage purposes, with respect to certain permitted resales of bonds at a market premium upon a conversion of the interest rate to a fixed interest rate to maturity, any premium properly received by an issuer pursuant to a qualified interest rate mode change is treated as additional sale proceeds (as defined in Reg. section 1.148-1(b)).
|
Certain Special Rules
Two special rules under Notice 2008-27 address certain temporary waivers of interest rate caps and certain nonrecourse debt. Notice 2008-41 continues those rules and extends the period during which interest rate caps may be waived without resulting in a significant modification under Reg. section 1.1001-3 until October 1, 2008.
Changes to Examples
Notice 2008-41 modifies Example 2 of Notice 2008-27 by removing “confusing” language. The IRS noted that no other inference was to be drawn with respect to the transaction.
Notice 2008-41 also adds an example to illustrate the temporary 180-day qualified tender bond remarketing requirement.
Scope and Effective Date
Notice 2008-41 applies solely for purposes of section 103 and sections 141 through 150. As it did when it issued Notice 2008-27, the IRS cautioned that no inference is to be drawn regarding whether a debt modification described in today’s notice would constitute an exchange for purposes of section 1001 or drawn about whether similar consequences would obtain if a transaction falls outside the scope of Notice 2008-41.
Notice 2008-41 is effective as of March 25, 2008.
The IRS has requested comments on today’s guidance. Comments are due by May 19, 2008.
|
Notice 2008-41 will appear in Internal Revenue Bulletin 2008-15, dated April 14, 2008.
For more information, contact Rick Speizman, National Partner-In-Charge, KPMG’s Exempt Organizations Tax Practice (ExoTax), at (202) 533-3084 or
rspeizma@kpmg.com
|
