In Notice 2019-39, the IRS establishes three parameters under which any current refunding bond issue whose proceeds are used to refund original bonds in a tax-exempt targeted bond program (qualified bonds) will constitute an issue of tax-exempt qualified bonds without regard to a bond volume cap or issuance time deadline for the original qualified bonds. The guidance responds to requests for clarification regarding whether bonds for certain targeted bond programs (typically for disaster relief) may be refinanced without applying to amend the bond volume cap.

Background

Targeted bond programs, which Congress occasionally authorizes under the IRC or in special legislation, allow state, local or tribal governments to issue tax-exempt bonds subject to bond volume caps and/or issuance time deadlines. Many of these targeted bond programs are aimed at providing disaster relief in particular geographic areas or at promoting economic development in underserved areas.

Unlike the statutory framework underlying the ongoing program for tax-exempt qualified private activity bonds under Section 141(e), the statutory provisions authorizing targeted bond programs typically do not address whether current refunding issues may be issued to refund or refinance the original bonds. The IRS has received questions asking whether: (1) the original bonds in targeted bond programs may be refinanced in current refunding issues without an additional volume cap; and (2) current refunding issues may be issued after the issuance deadline for the original bonds.

The IRS notes that current refunding issues "within appropriate size limits that do not increase the outstanding amount of tax-exempt bonds generally are favored transactions for economic and policy purposes" because they are intended to reduce borrowing costs and the costs of the associated tax benefit for the US Treasury. Current refunding issues have been expressly permitted for several targeted bond programs (e.g., under Notices 2012-3 and 2014-9, which are superseded by Notice 2019-39). In issuing Notice 2019-39, the IRS intends "to reduce or eliminate the need for separate program-by-program guidance on this favored type of refinancing for each [targeted bond] program."

Notice 2019-39

Notice 2019-39 applies to "qualified bonds," which the notice defines as tax-exempt bonds issued as current refunding issues to directly or indirectly refund original bonds in tax-exempt targeted bond programs that impose bond volume caps and/or issuance deadlines on the issuance of the original bonds. According to the notice, qualified bonds also include tax-advantaged Build America Bonds issued under former Section 54AA (repealed under the Tax Cuts and Jobs Act of 2017).

Notice 2019-39 provides that if the proceeds of a current refunding issue are directly or indirectly used to refund original qualified bonds, the refunding bonds will qualify as an issue of tax-exempt qualified bonds without regard to any bond volume cap or issuance deadline for the original qualified bonds if three requirements are met:

1. The original qualified bonds were issued with a required bond volume cap allocation and before any issuance deadline expired.
2. The issue price (defined in Reg. Section 1.148-1(f)) of the current refunding issue does not exceed the outstanding stated principal amount of the refunded bonds (defined in Reg. Section 1.1501(d)(5)).
3. The current refunding issue meets all applicable requirements for the issuance of qualified bonds, including: (i) under Section 149(g), the original qualified bonds meet requirements for hedge bonds; and (ii) under Section 147(b), private activity bonds meet the requirement that average bond maturity may not exceed 120% of the average reasonably expected economic life of facilities financed or refinanced with the issue's net proceeds

Effective dates

Notice 2019-39 applies to all current refunding issues issued on or after May 22, 2019, but issuers may also apply the notice retroactively.

Implications

Although previous IRS guidance has permitted current refunding issues for different targeted bond programs, Notice 2019-39 generally clarifies that bond issues of all targeted bond programs can be refinanced by a current refunding bond issue, without the need to issue future guidance. Due to the limited nature of these various programs (e.g., to help fund hurricane disaster areas), issuances of targeted bond programs typically have volume cap limitations from the issuing authority as well as time deadlines to issue, which could inhibit the ability to refinance with a tax-exempt current refunding under the existing statutory guidelines.

Notice 2019-39 alleviates these limitations by authorizing the current refunding (or series of current refundings) of qualified bonds without regard to the initial bond volume cap or issuance time deadline if the three requirements denoted above are met. This basically allows these targeted tax-exempt bonds, including Build America Bonds, to have the same flexibility as other tax-advantaged bonds.

Organizations that have issued bonds under a targeted bond program and have or are contemplating refinancing such bonds with a current refunding issue should review the provisions of Notice 2019-39 to determine its applicability to their specific fact pattern.

Please contact your Ernst & Young LLP professional for further information.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.

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