Tax News

CCH (cch.taxgroup.com) reports:

  The IRS plans to issue proposed regulations to amend its arbitrage regulations under Code Sec. 148 to make it easier for state perpetual trust funds to provide credit enhancement for municipal bonds in the wake of the financial crises.

  Arbitrage restrictions apply to the proceeds of state and local tax-exempt bond issues, and to replacement proceeds associated with those bond issues. Replacement proceeds can include funds pledged to provide assurance to investors that the principal and interest of the original issue will be paid. If certain requirements are met, an exception to the arbitrage rules applies under Reg. §1.148-11(d)(1) for perpetual trust funds set up by states to enhance the credit worthiness of its general issue bonds. One of the requirements is that, in the event there is a deposit in the fund to bolster the fund in light of the new obligation, the outstanding amount of the bonds guaranteed by the fund must not exceed 250 percent of the lower of cost or fair market value of the fund prior to the deposit.

  The IRS notes that the value of perpetual trust funds has been adversely affected by the financial crises, which in turn under these regulations adversely affects the ability of such funds to provide credit enhancement in the municipal bond market. Accordingly, the IRS plans to issue proposed regulations to amend this rule to change the amount to 500 percent of the total cost of the assets held by the fund as of December 16, 2009. Taxpayers can rely on the changed amount for bonds sold on or after December 16, 2009, and before the effective date of future regulations or guidance.

  Comment: The IRS intends for the new rule to completely take the place of the current rule rather than provide an optional means of satisfying the regulatory requirements.

  The IRS has asked for comments on the rule change, and on any other regulation under Code Sec. 148 that may impede an issuer's ability to obtain credit enhancement.

Notice 2010-5,
2010FED ¶46,204

Other References:

 
Code Sec. 148

  CCH Reference - 2009FED ¶7889.08

  CCH Reference - 2009FED ¶7889.18

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