Tax News

CCH (cch.taxgroup.com) reports:

The IRS has released proposed regulations on the arbitrage restrictions under Code Sec. 148 applicable to tax-exempt bonds issued by state and local governments. These proposed regulations are being issued in order to update existing regulations, address certain current market developments, simplify and correct certain provisions and to make existing regulations more administrable.
Hedges Based on Taxable Interest Rates
The proposed regulations make revisions to accommodate certain hedges in which floating payments under the hedge are based on a taxable interest rate and to clarify that bonds covered by such a hedge are ineligible for treatment as fixed yield bonds under the special hedging rule in Reg. §1.148-4(h)(4). The IRS has determined that taxable-index hedges based on widely-used taxable indices, such as LIBOR-based hedges, sufficiently improve the efficiency of the tax-exempt bond market to warrant accommodation. The regulations accommodate these hedges by modifying (1) the provisions for "yield reduction payments," which permit an issuer to reduce yield on an investment by making payments to the federal government in certain permitted circumstances to comply with yield restriction rules, and (2) the qualified hedge provisions.
The proposed regulations make clear, however, that while taxable-index hedges can be qualified hedges, and, therefore, eligible for simple integration, they are not eligible for super integration because there is an insufficient correlation between tax-exempt bond interest rates and taxable market interest rate indices. In addition, the regulations modify the yield reduction payment rules to permit issuers to make yield reduction payments on certain variable-yield advance refunding issues in which the issuer has entered into a qualified hedge in the form of a variable-to-fixed interest rate swap to hedge its interest rate risk.
Electronic GIC Bidding
The bidding safe harbor for establishing the fair market value of guaranteed investment contracts (GICs) to accommodate electronic bidding has been revised by the proposed regulations. The regulations amend the fair market value safe harbor for GICs to allow electronic bidding procedures by (1) permitting bid specifications to be sent electronically over the Internet or by fax, and (2) amending the last look rule to provide that there is not a prohibited last look if all bidders have an equal opportunity for a last look.
Other Provisions
The proposed regulations remove the provision in the existing regulations that permits the IRS Commissioner to authorize a single yield computation on multiple bond issues. The proposed regulations also clarify that the amount that an issuer is entitled to receive under a rebate refund claim is the excess of the total amount actually paid over the rebate amount.
Comments
Written or electronic comments must be received by December 24, 2007. Outlines of topics to be discussed at a public hearing scheduled for January 30, 2008, must be received by January 2, 2008.
Proposed Regulations, NPRM REG-106143-07, 2007FED ¶49,763
Other References:
Code Sec. 148
CCH Reference - 2007FED ¶7871C
CCH Reference - 2007FED ¶7874A
CCH Reference - 2007FED ¶7875B
CCH Reference - 2007FED ¶7876B
CCH Reference - 2007FED ¶7880C
CCH Reference - 2007FED ¶7888B
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