Future Guidance on Debt Extinguishment and Volume Cap Issues

The IRS and Treasury Department are considering providing future guidance as soon as reasonably possible on certain issues relating to both the extinguishment of tax-exempt obligations for federal tax purposes and the treatment of draws under a draw-down loan or commercial paper program for purposes of the application of the private activity bond volume cap under section 146 the Internal Revenue Code.

Extinguishment of Tax-Exempt Obligations

The IRS and Treasury Department provided temporary rules in response to auction failures in the auction rate securities sector of the tax-exempt bond market. The temporary rules allowed State and local governmental issuers to purchase and hold their own tax-exempt bonds without resulting in an extinguishment of the purchased bonds for federal tax purposes (See Notice 2008-88 (PDF) and Notice 2010-7 (PDF)). For reasons beyond their control, some issuers have been unable to remarket their bonds and have approached the IRS about the possibility of entering into a closing agreement to allow them to continue holding and remarketing their bonds for an additional period beyond that permitted under Notice 2010-7 (PDF).

The IRS expects to announce guidance on the availability of the TEB Voluntary Closing Agreement Program to provide that, upon the satisfaction of certain conditions, the extinguished bonds will be treated for federal tax purposes as though they were not extinguished from January 1, 2011 to a date specified in the closing agreement. Such conditions include the issuer’s expectation to successfully remarket its bonds within a limited time period.

Volume Cap Issues under Notice 2010-81

Notice 2010-81 (PDF) provided guidance regarding when State and local bonds are considered issued for purposes of various timing deadlines on issuing bonds. Issuers who entered into draw-down loans or commercial paper programs in 2010 before the release of Notice 2010-81 (PDF) on November 23, 2010 or in earlier years and who acquired private activity bond volume cap under section 146 for the entire loan or program under the assumption that all of the bonds were issued in the year that draws under the loan or program exceeded $50,000 or larger, have expressed to the IRS and Treasury Department concerns that States have taken different approaches towards the treatment of such draws for volume cap purposes under section 146.  States and issuers have indicated that changing the different approaches to volume cap in this area presents administrative difficulties.  A complicating issue with respect to such volume cap awards is that the awards in 2008, 2009, and 2010 may include volume cap from the temporary $11 billion increase in annual private activity bond volume cap established under the Housing Assistance Tax Act of 2008 (See Notice 2008-79 (PDF)).  That temporary volume cap is not available after 2010.

The IRS and Treasury Department are considering possible future guidance concerning these issues.  Separately, the TEB Voluntary Closing Agreement Program will be available for certain issues that are not addressed by such guidance.