Your 2024 Election Guide – Separate Issue Election and/or Multipurpose Issue Allocation (an Election of Sorts)?

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While probably not the most consequential election in 2024, a bond issuer might need to decide whether to make a separate issue election under Reg. §1.150-1(c)(3) and/or a multipurpose issue allocation under Reg. §§1.148-9(h) and 1.141-13(d).[1]  To ensure that issuers (and conduit borrowers)[2] are a fully informed electorate, this 2024 Election Guide will explain the who, what and why of each type of election or allocation (but not necessarily in that order).

Separate Issue Election

Who qualifies? An issuer issuing tax-exempt bonds that have more than one purpose (e.g., new money and refunding) – but only if the proceeds, investments and bonds of the aggregate issue are allocated between each of the separate purposes using a reasonable, consistently applied method.  It should be noted, however, that if a refunding is one of the separate purposes, certain multipurpose issue allocation criteria (discussed below) must also be met.

Why make a separate issue election?  An issuer will frequently make the separate issue election when governmental use bonds and tax-exempt qualified private activity bonds would otherwise be part of a single issue for federal income tax purposes (because the governmental use bonds and qualified private activity bonds will be payable from the same source of funds and will be sold at substantially the same time (i.e., within 14 days of each other) pursuant to the same plan of financing).  For example, a state university may be selling governmental use bonds and qualified 501(c)(3) bonds at substantially the same time pursuant to the same plan of financing, and these bonds are payable from the same source of funds.  Also, some airport financings involve both governmental use bonds and exempt facility bonds.  Both qualified 501(c)(3) bonds and exempt facility bonds are subject to more stringent rules than governmental use bonds.  Thus, it is often beneficial for the issuer to separate the governmental use bonds from the other more highly regulated qualified private activity bonds. 

A separate issue election may also be made where a single issue would violate the $150 million limit that applies to nonhospital, qualified 501(c)(3) bonds.  Under these circumstances, the 501(c)(3) conduit borrower will want to separate the portions of the issue subject to the $150 million limit (often the portion allocable to the direct or indirect refunding of much older bonds) from the portion that is not subject to such limit.     

What else should an informed issuer know?  The separate issue election does not apply for certain purposes, including, but not limited to, the private business use tests,[3] for arbitrage or rebate calculations, or when applying the hedge bond rules.  Also, this election must be made in writing by the issuer on or before the issue date (this is usually done in the tax certificate).

Multipurpose Issue Allocations

Who qualifies?  An issuer issuing tax-exempt bonds that have more than one purpose (e.g., new money and refunding) – but only if the proceeds, investments and bonds of the aggregate issue are allocated between each of the separate purposes using a reasonable, consistently applied method.  (Sound familiar?)  Also, if a refunding is a separate purpose, the bonds (or portions of bonds) of the issue must be allocated to that refunding portion either (i) using a pro rata allocation, (ii) in proportion to the remaining weighted average economic life of the refinanced capital projects, or (iii) to reflect what is commonly referred to as “debt service savings.”[4] 

Why would you want to make a multipurpose issue allocation?  Sometimes it’s required, or, at a minimum, advisable.  For example, for a separate issue election under Reg. §1.150-1(c)(3) to be valid (e.g., to avoid the $150 million limit applying to an entire issue) when one specific purpose is a current refunding, a multipurpose issue allocation under Reg. § 1.148-9(h) should also be made.  

Another reason to make a multipurpose issue allocation pursuant to Reg. § 1.148-9(h) is when a tax-exempt issue includes a current delivery portion intended to finance new money projects and a forward delivery portion intended to currently refund outstanding bonds.  (Remember, bonds that are issued on different dates are still part of one issue for federal tax purpose if they are sold at substantially the same time pursuant to the same plan of financing and are payable from the same source of funds).  If a multipurpose issue allocation were not made under these circumstances to allocate the refunding portion to the forward delivery bonds and the new money portion to the current delivery bonds, and the forward delivery portion is used to refund bonds more than 90 days after the current delivery portion is issued, an impermissible advance refunding will have occurred – making the entire issue taxable.  The advance refunding would arise because, in the absence of a multipurpose issue allocation to the contrary, a pro rata portion of each bond of the issue would be allocable to the refunding portion and the new money portion.  (Speaking of impermissible advance refundings, issuers used to make multipurpose issue allocations in order to isolate advance refunding bonds from a later advance refunding of bonds – back in the good old days – when issuers could generally advance refund tax exempt bonds with tax exempt bonds one time). 

A multipurpose issue allocation may also be made under the right circumstances to preserve the exception from rebate for small issuers when previously qualified bonds are being currently refunded. 

What else should an informed issuer know?  A multipurpose issue allocation does not apply to all tax-exempt bond provisions.  For example, it does not apply when determining yield or rebate payments or when calculating a reasonably required reserve. Moreover, unlike a separate issue election, which must be made on or before the issuance date of the issue, a multipurpose issue allocation can be made at any time.  Once made, however, the allocation cannot be changed, so choose wisely.  Finally, there are limitations for multi-generational issues, which the author of this blog post will not drive the readers crazy with now.[5]

TLDR – Although this 2024 Election Guide is intended to inform issuers and conduit borrowers of their options when a tax-exempt bond issue has more than one specific purpose, it is always best to discuss these matters with a public finance tax attorney.


[1] Reg. §1.141-13(d)(1) provides that “[f]or purposes of Section 141, unless the context clearly requires otherwise, §1.148-9(h) applies to allocations of multipurpose issues . . . including allocations involving the refunding purposes of the issue.”  Given the largely derivative nature of multipurpose issue allocations under Reg. §1.141-13(d), and in the interest of simplicity, references in this blog post to multipurpose issue allocations under Reg. §1.148-9(h) include such allocations under §1.141-13(d), unless, of course, the context clearly requires otherwise (which it won’t).  In case you were wondering, multipurpose issue allocations do not apply for purposes of Code Sections 141(c)(1) (private loan financing test) and 141(d)(1) (acquisitions of nongovernmental output property). 

[2] In the further interest of simplicity, the remainder of this blog post will use the term “issuer” to include issuers and conduit borrowers.

[3] Code Section 141(b)(9) does provide a bifurcation election for purposes of Sections 141(b) and (c) where a portion of the proceeds would be treated as a qualified 501(c)(3) bond had that portion been issued as a separate issue.

[4] The term “debt service savings” is a bit of a misnomer.  The regulations provide that the debt service on the refunding bonds must be “less than, equal to, or proportionate to” the debt service on the refunded bonds in each bond year.  (Reg. §1.148-9(h)(4)(v)(B)).

[5] You’re welcome.

How To Protect Against Harmful SLGS This Spring

On March 4, 2024, the Treasury Department published a final rule that amends the regulations concerning State and Local Government Series securities (SLGS).  Among other changes, the updated regulations notably: (1) require that the maturity lengths of Time Deposit SLGS be no longer than reasonably necessary for the underlying governmental purpose of the investment and that the Issuer certify to such in a new “duration certification”; (2) add to the non-exhaustive list of impermissible transactions; (3) increase to 14 days the minimum holding period for requesting early redemption; (4) require that the Issuer provide a maturity date at the start of a subscription rather than by completion of the subscription; (5) require a new “eligibility certification” by the Issuer as to its eligibility to purchase SLGS; and (6) require notice of five business days for redemptions of Demand Deposit SLGS of $500 million or more.  The updated regulations take effect August 26, 2024.

When does 10% PBU really mean 5% PBU?

When the Internal Revenue Code (“IRC”) says it does.  (For those of you that want to remind yourselves of how a bill becomes a law, such as the IRC, see this video from Schoolhouse Rock).        

As you may know, issuers of governmental-use bonds are generally permitted to use up to 10% of the tax-exempt bond proceeds of an issue for private business use (“PBU”) before the tax-exempt bonds run the risk of being characterized as taxable private-activity bonds (“PABs”).  If the PBU exceeds 10%, then the issuer will also need to determine whether the private security or payment (“Private Payment”) test is met in order to determine if the bonds are PABs.  (Remember, meeting the 10% PBU and  Private Payment tests is generally a bad thing).  However, because nothing is simple in the tax world, there is a second PBU/Private Payment threshold that you may not be as familiar with – the 5% unrelated or disproportionate test.[1]    

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House Passes $78 Billion Tax Bill that Includes Affordable Housing Help

On Wednesday, January 31, 2024, the U.S. House of Representatives passed the bill called the Tax Relief for American Families and Workers Act.  Contained in this bill is a significant reduction to the required amount of Section 142(d) Qualified Residential Project Bonds that must be issued to obtain the 4% Low Income Housing Tax Credit.  The author of this blog post co-authored a blog post[1] with Robert Labes on this very topic! 

Click here to access the blog post and other insights regarding Global Projects and Infrastructure! And stay tuned for more on this and other developments in affordable and workforce housing tax issues in the coming weeks!


[1] Kind of like Russian nesting dolls.

Love Me Tender [Bonds] – An Overview

The famous song, Love Me Tender, by Elvis Presley, includes lyrics such as “We’ll never part” and about being together “ ’Til the end of time.”  In contrast to Elvis’ wish, the issuer of tax-exempt bonds that makes a tender offer is hoping the exact opposite happens to the relationship between the bondholder and tax-exempt bond.  In other words, the issuer hopes that economics drive a wedge between the two.

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Keep Your Paws Off My Positive Arbitrage – “With the Same Power Comes More Responsibility” (3/3)

The time has come, friends. The Rebate Series ends with this post. At least for a little while. So far we’ve covered the basics of arbitrage and rebate and two key timing-based spending exceptions: the 6-Month Exception and the 18-Month Exception. This party bus now comes to a halt with the Two-Year Spending Exception, the last and longest of the timing-based exceptions to the rebate requirement. If you’ve made it this far, thank you. If this is your first rebate-related post, please read the previous posts setting the stage. 

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Keep Your Paws Off My Positive Arbitrage – “With Great Power Comes Some Responsibility” (2/3)

Our previous post kicked off our Rebate Series by introducing core concepts and terms. However, for every rule there is an exception. And, as you will learn shortly, for every exception there is an exception to that exception (except when there is not).

The next two episodes will focus on the so-called timing exceptions. In the rebate world, there are three: the 6-month, 18-month and two-year spending exceptions to the rebate requirement. Two general points to keep in mind: (1) each of these exceptions is independent of the others; so an issue could qualify under more than one, and (2) the spending exceptions are not automatically applied; so an issuer can choose NOT to apply them.

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Keep Your Paws Off My Positive Arbitrage (1/3)

Reader’s Note: As this is my first post on The Public Finance Tax Blog™ let me provide a necessary introduction. My name is Natalie, an associate with the Public Finance Tax Group here at Squire Patton Boggs. A little bit about me: I have the superhuman ability of not getting mosquito bites; I hate when people pronounce the “L” in salmon; and perhaps most relevant to you, if I can learn tax and finance concepts, so can you.

Additional Reader’s Note: This post has gone through several iterations already. Not because the information missed the mark (a junior associate’s worst nightmare, I promise you), but because I needed to “fun it up.” When tax lawyers call you boring, it may be time to rethink most if not all life decisions. Short of quitting my job, changing my name and generally falling off the face of the planet, I suppose I’ll start here. With this post. On Rebate. Naturally.

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When Overburdening isn’t a Burden

Cindy Mog recently reacquainted us with abusive arbitrage devices, including the factors that evidence overburdening of the tax-exempt bond market (issuing bonds too early, issuing too many bonds, and issuing bonds with an excessive weighted average maturity) and factors that countervail what would otherwise constitute overburdening (bona fide cost underruns, bona fide need to finance extraordinary working capital items, and an issuer’s long-term financial distress).

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Abusive Arbitrage Devices – It’s Time to Get Reacquainted 3/3

(Episode 3 – What Happens to the Arbitrage Sinners and the Arbitrage Saints?)

As you may remember, in Episode 1 we discussed some background regarding the prohibition against abusive arbitrage devices and the policy behind that prohibition – to encourage investment of tax-exempt bond proceeds in long-lived, tangible assets, while discouraging the generation of arbitrage on the investment of such proceeds.  In Episode 2 we discussed the three factors the federal government examines to determine whether an issuer has overburdened the tax-exempt bond market, which results in an abusive arbitrage device if the issuer has also successfully exploited the difference between taxable and tax-exempt interest rates.  In this episode, we will describe the penalties imposed upon rule-breakers and the rewards offered to rule-followers.

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