Johnny Hutchinson could tell you, from memory, that the Defenestration of Prague occurred on May 23, 1618, and it precipitated the Thirty Years’ War, which ended on May 15, 1648 upon the ratification of the first of a series of peace treaties that comprised the Peace of Westphalia.

In 1988, 370 years after the Defenestration of Prague, the IRS began its campaign of guidance regarding the reissuance for federal tax purposes of tax-exempt bonds (specifically, qualified tender bonds) with the issuance of Notice 88-130.  20 years later, in 2008, the financial crisis and collapse of the auction rate securities market compelled the Service to update this guidance, which it did by releasing Notice 2008-41.  On the very last day of 2018, more than 30 years after commencing this line of guidance (a period longer than the Thirty Years’ War), the IRS and Treasury released proposed regulations that, if finalized, would unify and complete the rules for determining whether tax-exempt bonds have been reissued for federal tax purposes (the “Proposed Reissuance Regulations“).

The Proposed Reissuance Regulations will take effect 90 days after they are published as final regulations in the Federal Register, but issuers of tax-exempt obligations can elect to apply the Proposed Reissuance Regulations now.  Alternatively, issuers can apply either Notice 88-130 or Notice 2008-41.  Dealer’s choice.  Comments and requests for a public hearing on the Proposed Reissuance Regulations must be received by the Treasury on or before March 1, 2019.  A brief summary of the Proposed Reissuance Regulations follows the jump.

The Proposed Reissuance Regulations largely accord with Notice 2008-41.  Under these Proposed Regulations, a tax-exempt obligation will be treated as retired for federal tax purposes if: (1) a “significant modification” of the obligation occurs for purposes of Treas. Reg. § 1.1001-3; (2) the issuer of the tax-exempt obligation (which includes a party related to the issuer) or the issuer’s agent acquires the obligation in a manner that eliminates or extinguishes the bondholder’s investment in the tax-exempt obligation; or (3) the tax-exempt obligation is otherwise redeemed.

Certain exceptions apply, but first a few things to note about the general rules.  In the case of a significant modification, the obligation as it exists after its modification is treated for federal tax purposes as having currently refunded the modified tax-exempt obligation.  The deemed current refunding obligation must independently satisfy the various requirements for tax-exempt status to be a tax-exempt obligation.  Also, where a conduit borrower of proceeds of a tax-exempt bond acquires that bond, the bond will be treated as retired only if the conduit borrower is related to the issuer or is the agent of the issuer, which is almost never the case.  Finally, if the issuer of a tax-exempt obligation or its agent acquires the tax-exempt obligation and then resells it, the resold obligation is a new bond for federal tax purposes.  In the unlikely event that the proceeds of this new bond are treated for such purposes as paying debt service on the prior bond, the new bond will be a refunding bond.  Otherwise, the new bond will be treated for such purposes as having been issued to finance new projects or working capital.  In either case, the new bond will be a tax-exempt obligation only it it independently complies with the requirements for tax-exempt status.

Now for the exceptions.  First, the existence and exercise of a qualified tender right (as defined in the Proposed Reissuance Regulations, linked above) are ignored for purposes of determining whether a significant modification of the tax-exempt obligation has arisen.  Thus, an interest rate mode change that occurs pursuant to the established terms of the tax-exempt bond would not result in a modification of that bond if the bondholder holds a qualified tender right, because that qualified tender right is disregarded and the issuer’s election to change the interest rate mode is considered the exercise of a unilateral option (which is not a modification of a debt instrument under Treas. Reg. § 1.1001-3).  Second, a tax-exempt obligation is not retired upon its acquisition by the issuer (or the issuer’s agent) if: (1) the bond is a qualified tender bond (as defined in the Proposed Reissuance Regulations, linked above); (2) the acquisition occurs pursuant to a qualified tender right; and (3) neither the issuer nor its agent holds the bond at the close of the 90-day period that begins on the date of the tender of the bond.  Finally, the purchase of a tax-exempt bond by a guarantor or liquidity facility provider acting on behalf of the issuer does not cause the retirement of that bond if the acquisition is made pursuant to the terms of the guarantee or liquidity facility and the guarantor or liquidity facility provider is not a related party to the issuer.

Like Notice 2008-41, the Proposed Reissuance Regulations do not neatly apply to bonds that are privately placed, rather than publicly offered.  It is a certainty that comments on these Proposed Regulations will seek modifications that would make any final regulations squarely applicable to privately placed tax-exempt bonds.