The Internal Revenue Service (IRS) issued a proposed rule on reissuance of state or local bonds. The proposed rule provides steps for determining when tax-exempt bonds are treated as retired for purposes of sections 103 and 141 through 150 of title 26 of the Code of Federal Regulations. The proposed rule also amends §1.1001–3(a)(2) of the Internal Revenue Code to conform that section to the special rules in the proposed rule for retirement of qualified tender bonds.

Under the proposed rules a tax-exempt bond would be considered retired if a significant modification to the terms of the bond occurs under § 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 is otherwise redeemed.

The proposed rule also prescribes certain consequences for a bond that is retired pursuant to a deemed exchange under § 1.1001–3 or following the acquisition of the bond by the issuer or the issuer’s agent.

The proposed rule provides three exceptions that limit retirements resulting from the operation of the general rules:

  1. A tender option bond avoids retirement by disregarding a qualified tender right for purposes of determining whether a significant modification of a qualified tender bond under § 1.1001–3 results in retirement of the bond.
  2. 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.
  3. 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 § 1.150–1(b)) to the issuer.

Comments are due March 1, 2019.