The Internal Revenue Service finalized its rules on when tax-exempt bonds can be considered retired, a regulation that affects any state and local government issuing that form of debt.
"The intent of the final regulations is to provide administrability in a complex area of the law by integrating the rules for the retirement-reissuance of tax-exempt bonds as closely as possible with existing general body of law governing all types of debt instruments," said Edwin Oswald, a partner with Orrick.
The ruling, which was published Dec. 30, is designed to clarify regulations contained in sections 103 and 141-150 of the tax code. Retiring refers to an organization repurchasing bonds it had previously issued to investors.
Treasury Notices 88-130 and 2008-41 attempted to fine tune those sections and stretch back to the financial crisis when the IRS allowed issuers to retire bonds using standards from either notice.
The notices are similar but not identical in their requirements, especially regarding how qualified tender bonds can be retired while remaining tax exempt.
The new clarifications are designed to apply the same standards used for retiring tax-exempt bonds as other types of debt instruments.
The rules comes into play if the terms and conditions of a bond are changed after the bond is issued.
Oswald sites an example by saying, "After the issuance of a fixed rate bond, an issuer and the bondholder negotiate and later agree to change the interest rate and final maturity date of a bond."
"If such actions cause a reissuance, a new bond is deemed to be issued in place of the old bond. In the case of a reissuance, the reissued bond must be retested under the applicable tax rules to determine if the interest is excluded from federal gross income, as if were a new bond issue."
The legal nuances in the notices combined with public comments that were collected in response to a 2018 notice prompted the IRS to issue the new clarifications.
Per the IRS, "The final regulations authorize the Commissioner to publish guidance in the Internal Revenue Bulletin that allows issuers to elect to treat tax-exempt bonds as retired and reissued in specific circumstances for purposes of sections 103 and 141 through 150."
The final regulations become fully effective on bonds issued on or after December 30, 2025, although issuers may choose to apply them before that date.
Notices 88-130 and Notice 2008-41 are obsolete on the same date.
