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IRS and Treasury Release Expanded Guidance Allowing Governmental Issuers to Purchase Their Own Tax-Exempt Debt

    Client Alerts
  • October 06, 2008

On October 1, 2008, the Internal Revenue Service (IRS) and Treasury Department released Notice 2008-88, which provides expanded relief for governmental issuers desiring to purchase their own tax-exempt debt.  Notice 2008-88 amends and supplements guidance provided by the IRS and Treasury earlier this year.


Under general federal tax principles, the purchase by an issuer of its own debt results in an extinguishment of that debt.  An extinguishment of tax-exempt debt using equity of the issuer may result in significant adverse consequences, including the inability of the issuer to later refinance the deemed extinguished debt.  Notice 2008-41, issued earlier this year in connection with the collapse of the auction rate market, provides limited relief from debt extinguishment for qualified tender bonds by allowing governmental issuers to purchase their own tax-exempt debt under certain circumstances.  "Qualified tender bonds" for these purposes includes most variable rate bonds issued in North Carolina and South Carolina, but please check with a member of Parker Poe's Public Finance group for advice regarding your specific debt.

Notice 2008-88

Notice 2008-88 expands the guidance set forth in Notice 2008-41 allowing governmental issuers to purchase their own tax-exempt debt.  Under Notice 2008-88, qualified tender bonds and tax-exempt commercial paper purchased by a governmental issuer on a temporary basis will not be deemed reissued or extinguished, irrespective of when the governmental issuer acquired the debt, so long as the governmental issuer does not hold the debt beyond December 31, 2009.  During the time that the governmental issuer holds the debt, the issuer may refund the debt, tender the debt for purchase pursuant to a tender right, or re-sell the debt.  For tax-exempt commercial paper that is acquired, a subsequent refinancing of the commercial paper during the permitted holding period will be treated as part of the same commercial paper issue.  Beyond December 31, 2009, an issuer generally may not hold its own debt without causing a reissuance or extinguishment.
Notice 2008-88 also extends the guidance set forth in Notice 2008-41, allowing issuers to waive interest rate caps on tax-exempt auction rate bonds without triggering a reissuance, from October 1, 2008 to December 31, 2009.

Impact of Notice 2008-88 on Issuers of Tax-Exempt Debt

Notice 2008-88 significantly liberalizes the ability of governmental issuers to acquire their own tax-exempt debt without triggering adverse tax consequences.  Issuers considering acquiring their debt are encouraged to contact any member of Parker Poe's Public Finance Group to discuss how Notice 2008-88 impacts their particular situation.