n-08-88.pdf

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Part III – Administrative, Procedural, and Miscellaneous

Expanded Temporary Rule Allowing Governmental Issuers to Purchase Their
Own Tax-Exempt Bonds

Notice 2008-88

SECTION 1. Purpose

This Notice amends and supplements Notice 2008-41, 2008-15 I.R.B. 742 (April
14, 2008), regarding reissuance standards for tax-exempt bonds. (Defined terms in
Notice 2008-41 shall have the same meanings when used in this Notice.) This Notice
expands the circumstances and time periods during which the Treasury Department
and the Internal Revenue Service (“IRS”) will treat a tax-exempt bond that is purchased
by its state or local governmental issuer as continuing in effect without resulting in a
reissuance or retirement of the purchased tax-exempt bond solely for purposes of § 103
and §§ 141 through 150 of the Internal Revenue Code, as amended (“Code”). (Except
as noted, section references in this Notice are to the Code and the Income Tax
Regulations.) This Notice is intended to provide flexibility to assist state and local
governments in efforts to facilitate liquidity and stability in the short-term sector of the
tax-exempt bond market.
SECTION 2. Background
In response to auction failures and liquidity constraints in the auction rate bond
sector of the tax-exempt bond market, § 4 of Notice 2008-41 provides a special
temporary rule which allows governmental issuers to purchase their own tax-exempt
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auction rate bonds on a temporary basis without resulting in a reissuance or retirement
of the purchased tax-exempt bonds solely for purposes of § 103 and §§ 141 to 150. To
be eligible for that special rule, a governmental issuer must purchase the tax-exempt
auction rate bonds before October 1, 2008, and hold those bonds for not more than a
180-day period from the date of purchase.
Recently, circumstances affecting liquidity and stability in the credit markets have
extended beyond the auction rate bond sector to affect other sectors of the short-term
tax-exempt bond market, including other “qualified tender bonds” (as defined in § 3.2 of
Notice 2008-41) (e.g., variable rate demand bonds with seven-day put options) and tax-
exempt commercial paper. In the case of commercial paper, a special rule under
§ 1.150-1(c)(4)(ii) allows certain short-term tax-exempt bonds issued pursuant to the
same commercial paper program to be treated as part of the same issue. For purposes
of this Notice, references to “tax-exempt commercial paper” means tax-exempt bonds
issued pursuant to the same commercial paper program that are treated as a single
issue under this special rule in § 1.150-1(c)(4)(ii).
This Notice expands the circumstances and time periods during which
governmental issuers may purchase their own tax-exempt bonds to include the
purchase and holding of all qualified tender bonds and tax-exempt commercial paper
through the end of 2009. This Notice also extends certain other time deadlines for
special rules in Notice 2008-41.
SECTION 3. Scope and Application
3.1 Expanded Temporary Rule Allowing Governmental Issuers to Purchase
Their Own Tax-Exempt Bonds. Solely for purposes of § 103 and §§ 141 through 150,
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the Treasury Department and the IRS will treat a tax-exempt “qualified tender bond” (as
defined in Notice 2008-41) or “tax-exempt commercial paper” (as defined in § 2 of this
Notice) that is purchased by its “governmental issuer” (as defined in Notice 2008-41) on
a temporary basis as continuing in effect without resulting in a reissuance or retirement
of the purchased tax-exempt bond if, irrespective of when the governmental issuer
purchases the bond (including a purchase of a bond before October 1, 2008), the
governmental issuer holds the bond until not later than December 31, 2009.
Subsequent to the end of this period, a governmental issuer generally may not hold its
own bond without causing a reissuance or retirement of such bond under the general
rules in § 3.1 of Notice 2008-41 and other applicable law.
Thus, recognizing that the purchased bond is treated as continuing in effect
without resulting in a reissuance or retirement of that bond solely for purposes of § 103
and §§ 141 through 150 during the permitted holding period until not later than
December 31, 2009 (“permitted holding period”), the governmental issuer may refund
the purchased bond with a refunding bond, tender the purchased bond for purchase in a
qualified tender right in its capacity as a bondholder, or otherwise resell the purchased
bond during this permitted holding period. Further, in the case of the purchase of any
particular obligation of tax-exempt commercial paper, including a purchase of such a
particular obligation at maturity, a refinancing of that purchased tax-exempt commercial
paper during the permitted holding period will be treated as part of the same issue as
the issue of which the purchased tax-exempt commercial paper was a part. After the
end of this permitted holding period, however, a governmental issuer generally may not
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hold its own bond without causing a reissuance or retirement of such bond under the
general rules in Notice 2008-41 and other applicable law.
3.2 Extension of Certain Other Time Limits for Special Rules in Notice 2008-41
.
Section 3.2(3)(b) of Notice 2008-41 regarding operating rules for qualified tender rights
is amended to extend the final date for purchase of bonds pursuant to qualified tender
rights for which the special 180-day holding period applies (in lieu of the general 90-day
holding period rule for this purpose) from October 1, 2008 to December 31, 2009.
Section 6.2 of Notice 2008-41 regarding the treatment of certain waivers of interest rate
caps on tax-exempt auction rate bonds is amended to extend the final date on which
covered waivers of interest rate caps are disregarded from October 1, 2008 to
December 31, 2009.
3.3 No Inferences on Law
. This Notice provides administrative relief in
furtherance of public policy to promote liquidity and stability in the short-term tax-exempt
bond market. Except with respect to the administrative relief expressly provided in this
Notice, no inference should be drawn from this Notice regarding any other Federal tax
issues affecting tax-exempt bonds or any other security. In addition, this Notice is not
intended to address any other Federal tax issue implicated in the transactions described
in this Notice allowing governmental issuers to purchase their own tax-exempt bonds on
a temporary basis in prescribed circumstances.
SECTION 4. Effect on other Documents
This Notice amends and supplements Notice 2008-41.
SECTION 5. Effective Date
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This Notice is effective as of March 25, 2008, which is the effective date of Notice
2008-41. Issuers of tax-exempt bonds may apply and rely on this Notice to the same
extent and in the same manner as provided in § 8 of Notice 2008-41.
SECTION 6. Drafting Information
The principal author of this Notice is Timothy L. Jones, of the Office of Associate
Chief Counsel (Financial Institutions and Products). However, other personnel from the
IRS and the Treasury Department participated in its development. For further
information regarding this Notice, contact Mr. Jones at (202) 622-3980 (not a toll-free
call).