IRS Proposes Updated Regulations For Tax-Advantaged Bonds

The U.S. Department of the Treasury and the Internal Revenue Service recently issued proposed regulations addressing technical provisions applicable to tax-advantaged bonds, including tax-exempt municipal bonds and other federally subsidized bond programs. The proposed rules (REG-117298-21) are intended to update and clarify existing Treasury Regulations governing the issuance and administration of these bonds by state and local governments. Tax-advantaged bonds allow governmental issuers to borrow at lower interest rates because the interest paid to bondholders receives favorable federal tax treatment.

Among other things, the proposed regulations address remedial action rules applicable when bond-financed property is later used in a manner that would otherwise violate the federal tax requirements for tax-advantaged bonds. Current regulations permit issuers to preserve the tax-advantaged status of bonds in certain circumstances by taking corrective actions, such as redeeming or nullifying outstanding bonds, when a deliberate action causes bond-financed property to become used for private business purposes. The proposed regulations refine and expand these remedial action provisions, including circumstances involving changes in use resulting from modifications to management contracts or other arrangements that could create impermissible private business use.

The proposal also clarifies the treatment of certain transfers or modifications involving bond-financed property, including circumstances in which the property is sold, leased, or otherwise transferred after the bonds are issued. The regulations provide additional guidance regarding when such actions constitute a "deliberate action" that could jeopardize the tax-advantaged status of the bonds and describe the conditions under which issuers may take remedial actions to maintain compliance with federal tax rules.

In addition, the proposed regulations update several technical definitions and cross-references within the tax-advantaged bond regulatory framework to improve consistency with statutory provisions enacted since the original regulations were issued.

Treasury and the IRS indicated that the revisions are intended to "modernize the regulatory regime and provide greater clarity to issuers, conduit borrowers, and market participants that rely on tax-advantaged bonds to finance public infrastructure, educational facilities, health care facilities, and other qualified projects."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.