[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