On December 30, 2024, the Internal Revenue Service (IRS) published final regulations1 to address when tax-exempt bonds are treated as retired for the purposes of sections 103 and 141 through 150 of the Internal Revenue Code (Code). The final regulations follow proposed regulations published on December 31, 2018,2 and prior rules and guidance in 1988, 1996, and 2008.3 Under the final regulations, the 1988 guidance and the 2008 guidance (Notice 88-130 and Notice 2008-41, respectively) are obsolete as of December 30, 2025.
The final regulations are largely consistent with the proposed regulations (summarized here). Under the final regulation, generally, a tax-exempt bond is retired when (1) a significant modification of the bond occurs under Section 1.1001-3, (2) the issuer or its agent acquires the bond in a manner that extinguishes the bond,4 or (3) the bond is otherwise redeemed.
The final regulations contain the same three exceptions as the proposed regulations, except as noted below with respect to the two qualified tender bonds exceptions.
In contrast to the proposed regulations, and in response to several comments received by the IRS, the final regulations:
- in the definition of a qualified tender right, allow a bond to be resold at a premium or discount price (rather than a price equal to par) when the qualified tender right is exercised in connection with a conversion of the interest rate mode to a fixed rate for the remaining term of the bond. Note, Notice 2008-41 also permits a qualified tender bond to be resold at a premium or discount in connection with a conversion of the interest rate mode to a fixed rate for the remaining term of the bond and treats any premium received by the issuer upon resale of the bond as additional sale proceeds for purposes of the arbitrage investment restrictions under section 148 of the Code. The final regulations also treat the premium received by the issuer upon resale of the bond as additional sale proceeds for purposes of the arbitrage investment restrictions under section 148 of the Code.
- in the definition of a qualified tender right, permit the same parties that may purchase the tendered bond (the issuer, its agent, or another party) to resell the bond (and eliminates the requirement that the bond be resold by a “remarketing agent”).
- make clear that the exception for disregarding a qualified tender right, when applying section 1.1001-3 of the Code to a qualified tender bond, only applies for the purposes of determining whether an alteration of the interest rate or interest rate mode that occurs under the terms of the bond results in a retirement (and does not apply to any other change, such as a change in maturity or collateral, even if contemporaneous with such alternation).
- may allow issuers to elect to treat tax-exempt bonds as retired for purposes of sections 103 and 141 through 150 of the Code in specific circumstances according to additional guidance that may be published in the Internal Revenue Bulletin.
The final regulations apply to events occurring and actions taken on or after December 30, 2025, although an issuer may choose to apply the final regulations on or after December 30, 2024.
If you have any questions regarding the content of this alert, please contact Sharon Brown, Public Finance Practice Area co-chair, at slbrown@barclaydamon.com; Carolyn Trespasz, associate, at ctrespasz@barclaydamon.com; or another member of the firm’s Public Finance Practice Area.
189 FR 106315-106320; see Section 1.150-3 of the Code.
283 FR 67701; see also REG-0141739-08.
3See IRS Notice 88-130, 61 FR 32926 (the 1996 final regulations) and IRS Notice 2008-41.
4The second prong of the three-part standard was changed from “. . . extinguishes the bondholder’s investment in the bond” in the proposed regulations, to “. . . extinguishes the bond” in the final regulations.